IFRS VS US GAAP:
DISPATCHES FROM THE INTERNATIONAL BATTLEFIELD
A thesis submitted to the University of Manchester for the degree of
Doctor of Philosophy
in the Faculty of Humanities
2016
Ersa Tri Wahyuni
Accounting and Finance Division
Alliance Manchester Business School
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Contents
List of Tables ________________________________________________________ 6
List of Figures _______________________________________________________ 7
Copyright __________________________________________________________ 8
Declaration __________________________________________________________ 8
List of Abbreviations and Acronyms ______________________________________ 9
Abstract _________________________________________________________ 12
Acknowledgement ___________________________________________________ 14
Chapter 1. Introduction _______________________________________________ 15
1.1 Background _________________________________________________________ 15
1.2 Research objectives ___________________________________________________ 21
1.3 Research methodology ________________________________________________ 22
1.4 The layout of the thesis ________________________________________________ 23
Chapter 2. The Rise of IFRS ___________________________________________ 26
2.1 Introduction _________________________________________________________ 26
2.2 The world pursuit of global accounting standards __________________________ 28
2.3 International institutions involved in the diffusion of IFRS in its early period. __ 31
2.4 Important milestones in the diffusion of IFRS (1998-2008)___________________ 34
2.5 IFRS v US GAAP and the global financial crisis ___________________________ 42
2.6 Conclusion __________________________________________________________ 45
Chapter 3. Literature Review ___________________________________________ 47
3.1 Introduction _________________________________________________________ 47
3.2 Does IFRS produce better quality accounting information? __________________ 48
3.3 The reasons why countries adopt IFRS ___________________________________ 53
3.4 The study of accounting standard setting: Identifying the research gap ________ 55
3.5 Conclusion __________________________________________________________ 57
Chapter 4. Framing the IFRS Adoption Process: The Value of an Institutional
Perspective _______________________________________________ 59
4.1 Introduction _________________________________________________________ 59
4.2 IFRS diffusion and globalisation from a world society perspective ____________ 61 4.2.1 Understanding the key players involved in the diffusion of IFRS_____________________ 64
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4.3 Understanding the process of IFRS adoption from the perspective of adopting
countries __________________________________________________________ 66 4.3.1 Criticisms of institutional isomorphism in the studies of IFRS _______________________ 67 4.3.2 Looking closer at the process: Institutional work theory ____________________________ 69 4.3.3 Creating institutional work __________________________________________________ 72 4.3.4 Maintaining institutional work _______________________________________________ 73 4.3.5 Disrupting institutional work _________________________________________________ 75
4.4 Conclusion __________________________________________________________ 76
Chapter 5. Studying IFRS Adoption Processes: A Research Methodology _______ 78
5.1 Introduction _________________________________________________________ 78
5.2 Research paradigm ___________________________________________________ 79
5.3 The case studies: Country selection criteria _______________________________ 81
5.4 Research design ______________________________________________________ 83 5.4.1 Research questions ________________________________________________________ 85 5.4.2 Data collection ____________________________________________________________ 86 5.4.3 Selection criteria of respondents and their profile _________________________________ 88 5.4.4 Gaining access and interview procedure ________________________________________ 90 5.4.5 Data analysis _____________________________________________________________ 91
5.5 Writing the thesis _____________________________________________________ 95
5.6 Reliability and validity assessment ______________________________________ 98
5.7 Conclusion _________________________________________________________ 101
Chapter 6: Legalistic Mechanisms as Institutional Work in Processes of IFRS
Adoption in Emerging Economies: Case Studies of the Philippines and
Brazil ___________________________________________________ 102
6.1 Introduction ________________________________________________________ 102
6.2 IFRS adoption in the Philippines _______________________________________ 103 6.2.1 The harmonisation period: 1996-2000 ________________________________________ 104 6.2.2 The decision-making period: 1998/1999 and 2004 _______________________________ 106 6.2.3 The transition period: 2001-2005 ____________________________________________ 109 6.2.4 The implementation period beyond 2005: New option for non-listed companies ________ 112
6.3 IFRS adoption in Brazil ______________________________________________ 114 6.3.1 The harmonisation period: Before 2006 _______________________________________ 118 6.3.2 The decision-making period: 2007 ___________________________________________ 120 6.3.3 The transition period: 2007-2010 ____________________________________________ 123 6.3.4 The implementation period beyond 2010: Onerous application of few standards________ 125
6.4. Discussion: A strong legal mandate has encouraged adoption _______________ 128
6.5 Conclusion _________________________________________________________ 132
Chapter 7. Lobbying Mechanisms in IFRS Adoption: The Case of Canada and
Indonesia _______________________________________________ 133
7.1 Introduction ________________________________________________________ 133
7.2 IFRS adoption in Canada _____________________________________________ 134 7.2.1 The harmonisation period: 1998-2004 ________________________________________ 135 7.2.2 The decision-making period: 2004-2006 _______________________________________ 137 7.2.3 The transition period: 2006-2008 ____________________________________________ 145 7.2.4 The implementation period beyond 2011: The case of rate-regulated entities. __________ 152
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7.3 IFRS convergence in Indonesia ________________________________________ 155 7.3.1 The harmonisation period: 1994-2004 ________________________________________ 156 7.3.2 The decision-making period: 2004 – 2008 _____________________________________ 161 7.3.3 The transition period: 2009 – 2011 ___________________________________________ 166 7.3.4 The implementation period beyond 2012: The case of accounting for land and IAS 41 ___ 171
7.4 Discussion __________________________________________________________ 172 7.4.1 IFRS vs US GAAP adoption decision: Was it ever about quality? ___________________ 175
7.5 Conclusion _________________________________________________________ 176
Chapter 8. Market Mechanisms and IFRS Convergence in Advanced Economies:
The Case of Japan ________________________________________ 178
8.1 Introduction ________________________________________________________ 178
8.2 “Big Bang” and the harmonisation period: 1996-2004. _____________________ 179
8.3 The decision-making period: 2005-2010 _________________________________ 182
8.4 The transition period: 2010-2013 _______________________________________ 189
8.5 Strategic repositioning: IFRS in Japan beyond 2013 _______________________ 194
8.6 Discussion __________________________________________________________ 202 8.6.1 Market competition as institutional work in IFRS convergence processes _____________ 204 8.6.2 Key actors in IFRS convergence process in Japan. _______________________________ 206
8.7 Conclusion _________________________________________________________ 208
Chapter 9. One Set of Global Accounting Standards: Is IFRS Adoption the Only
Way? The Case of the US __________________________________ 211
9.1 Introduction ________________________________________________________ 211
9.2 2000-2005: The warm period __________________________________________ 213
9.3 2005-2008: The golden period _________________________________________ 216
9.4 2009-2012: The disappointment period __________________________________ 222
9.5 Beyond 2012: Will the US eventually adopt IFRS? ________________________ 232
9.6 Discussion: What can we learned from the US case? _______________________ 234
9.7 Conclusion _________________________________________________________ 237
Chapter 10. The Institutional Work of IFRS Adoption: Transforming Accounting
Regulatory Fields _________________________________________ 239
10.1 Introduction _______________________________________________________ 239
10.2 Theorising the IFRS adoption process: the dynamics of institutional work ___ 241
10.3 Disrupting institutional work _________________________________________ 247 10.3.1 Undermining the ‘localism’ logic of the old accounting standard ___________________ 247 10.3.2 Disrupting the full adoption of IFRS ________________________________________ 249 10.3.3 Prohibiting the continued use of old standards. _________________________________ 251
10.4 Creating institutional work __________________________________________ 252 10.4.1 IFRS as a high quality accounting standard: Image-making processes _______________ 253 10.4.2 Reconfiguration of belief systems ___________________________________________ 256 10.4.3 The creation of competition logic ___________________________________________ 259
10.5 Maintaining institutional work _______________________________________ 260 10.5.1 Resisting new (and maintaining old) standard __________________________________ 261
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10.5.2 Maintaining the IFRS adoption decision: Reinventing the old actors ________________ 263 10.5.3 Maintaining full IFRS adoption _____________________________________________ 265
10.6 Beyond implementation: The new battlefields ___________________________ 267 10.6.1 The emergence of regional clubs: The new organisational field? __________________ 268
10.7 Conclusion ________________________________________________________ 269
Chapter 11. Overall Conclusions _______________________________________ 271
11.1 Overview of the study _______________________________________________ 271
11.2 Summary of main findings ___________________________________________ 272
11.3 Implications of the study _____________________________________________ 275
11.4 Research contributions and policy recommendations _____________________ 277
11.5 Agenda for future research ___________________________________________ 281
Reference List ______________________________________________________ 283
Appendix 1. Interview Log ____________________________________________ 296
Appendix 2. Summary of IFRS adoption in sampled countries _______________ 303
Word Count: 90,455
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List of Tables
Table 1. The Financial Stability Forum’s 12 key standards for sound financial systems ......... 36
Table 2. Comparison of realist perspectives and world society perspectives ............................ 64
Table 3. Creating institutions .................................................................................................... 72
Table 4. Maintaining institutions ............................................................................................... 74
Table 5. Disrupting institutions ................................................................................................. 75
Table 6. Data types utilised in the study .................................................................................... 88
Table 7. Respondents’ profile by country and institutions ........................................................ 89
Table 8. Timeline of IFRS adoption in the Philippines ........................................................... 113
Table 9. Accounting standards applied in Brazil prior to IFRS adoption ............................... 117
Table 10. Timeline of IFRS adoption in Brazil ....................................................................... 125
Table 11 Arguments for and against US GAAP in Canada .................................................... 142
Table 12 Arguments for and against IFRS in Canada ............................................................. 143
Table 13. Public engagement activities by AcSB members/staff to stakeholders during 2006-
2008 ........................................................................................................................ 147
Table 14 Timeline of Canadian IFRS adoption and relevant events in the US ....................... 152
Table 15. Timeline of Indonesia’s convergence process ......................................................... 168
Table 16. Comparison between the ROSC draft and the ROSC final report of Indonesia ...... 170
Table 17. Japanese companies to have voluntarily adopted IFRS by June 2013 .................... 193
Table 18. Accounting standards in the Japan before and after June 2013 ............................... 196
Table 19. Japanese IFRS convergence timeline with relevant international events ................ 201
Table 20. Reasons for the US not adopting IFRS based on US field interviews..................... 231
Table 21. Transition relief and ‘carve outs’ undertaken by sampled countries ....................... 251
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List of Figures
Figure 1. Timeline of the global diffusion of IFRS ................................................................... 46
Figure 2. Inductive research approach adopted in the study ..................................................... 84
Figure 3. Data analysis .............................................................................................................. 93
Figure 4. Thematic analysis of interview data ........................................................................... 94
Figure 5. Stages in IFRS adoption ............................................................................................. 98
Figure 6. The Institutionalisation of IFRS ............................................................................... 242
Figure 7. The cycle of IFRS image-making ............................................................................ 254
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Copyright
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institute of learning;
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List of Abbreviations and Acronyms
AAA American Accounting Association
AASC Auditing and Accounting Standards Council
ABRASCA Association of Listed Corporations (Brazil)
ACCA The Association of Chartered Certified Accountants
AcSB Accounting Standard Board (Canada)
AICPA American Institute of Certified Public Accountants
AISG Accountants International Study Group
AOSSG Asian-Ocenian Standard-setter Group
APB Accounting Principles Board (The US)
ASAF Accounting Standards Advisory Forum
ASB Accounting Standards Board
ASBJ Accounting Standards Board of Japan
ASC Accounting Standards Council
ASIC Australian Securities and Investments Commission
BCB Banco Central do Brasil (Central Bank of Brazil)
BI Bank Indonesia (Central Bank of Indonesia)
BIS Bank for International Settlement
BOA Board of Accountancy (The Philippines)
BOVESPA São Paulo Stock Exchange
BSP Bangko Sentral ng Pilipinas (Central Bank of the Philippines)
CAPA Confederation of Asian and Pacific Accountants
CbC Country by Country Reporting
CC Commercial Code (Japan)
CFC/CRC Federal / Regional Accounting Council (Brazil)
CICA Canadian Institute of Chartered Accountants
CPA Certified Public Accountant
CPC Accounting Standards Committee (Brazil)
CVM Securities and Exchange Commission of Brazil.
DPN Dewan Pengurus Nasional (IAI National Council) (Indonesia)
DSAK Dewan Standar Akuntansi Keuangan (Indonesian Financial Accounting
Standards Board)
EC European Commission
EFRAG European Financial Reporting Advisory Group
ESMA European Securities and Markets Authorities
EU European Union
FASB Financial Accounting Standard Board (The US)
FATF Financial Action Task Force
FEE The Fédération des Experts Comptables Européens (Federation of
European Accountants)
FIBV Federation Internationale des Bourses de Valeurs (International Federation
of Stock Exchanges)
FINEX Financial Executives Institute of the Philippines
FRC Financial Reporting Council (The Philippines)
FRSC Financial Reporting Standards Council (The Philippines)
FSAP Financial Sector Assessment program
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FSB Financial Stability Board
FSF Financial Stability Forum
G20 Group of Twenty (International forum for the governments and central
bank governors from 20 major economies)
G7 Group of Seven (Group of finance ministers and central bank Governors of
7 countries: Canada, France, Germany, Italy, Japan, United Kingdom and
United States
GLASS Group of Latin America Accounting Standard-setters
GRI Global Reporting Initiative
IAFEI International Association of Financial Executives Institutes
IAI Ikatan Akuntan Indonesia (Indonesian Institute of Accountants)
IAIS International Association of Insurance Supervisors
IAS International Accounting Standards
IASB International Accounting Standards Board
IASC International Accounting Standards Committee
IBRACON Institute of Independent Auditors (Brazil)
ICAEW Institute of Chartered Accountants in England and Wales (ICAEW)
ICANN Internet Corporation for Assigned Names and Numbers
ICCAP International Co-ordination Committee for the Accountancy Profession
IFAC International Federation of Accountants
IFASS International Forum of Accounting Standard-setters
IFRIC International Financial Reporting Interpretations Committee
IFRS International Financial Reporting Standards
ILO International Labour Organisation
IMF International Monetary Fund
INTOSAI The International Organisation of Supreme Audit Institutions
IOSCO International Organisation of Securities Commissions
IPSAS International Public Sector Accounting Standards
ISAR Intergovernmental Working Group of Experts on International Standards of
Accounting and Reporting (United Nations)
ISO International Organisation for Standardisation
JFSA Japanese Financial Service Agency
JICPA Japanese Institute of Certified Public Accountant
JMIS Japan Modified International Standards
MoF Ministry of Finance
MoU Memorandum of Understanding
NSS National Standard-setters
NYSE New York Stock Exchange
OECD Organisation for Economic Co-operation and Development
OEEC Organisation of European Economic Cooperation
OGA Office of the General Accountant
OJK Otoritas Jasa Keuangan (Financial Services Authority) (Indonesia)
PAS Philippine Accounting Standard
PCAOB Public Company Accounting Oversight Board
PFRS Philippine Financial Reporting Standard
PICPA Philippine Institute of Certified Public Accountants
PSAK Penyataan Standar Akuntansi Keuangan (Indonesian Financial Accounting
Standards)
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ROSC Report on the Observance of Standards and Codes
RRA Rate-Regulated Assets
RRL Rate-Regulated Liabilities
SAAJ The Securities Analysts Association of Japan
SAK Standar Akuntansi Keuangan (Accounting standards) (Indonesia)
SEC Securities and Exchange Commission
SME Small and Medium Enterprises
SOE State-Owned Enterprises
SRC Securities Regulation Code (The Philippines)
SUSEP Superintendency of Private Insurance
TFOSS Task Force on Standard Setting (Canada)
UK GAAP United Kingdom Generally Accepted Accounting Principles
US GAAP United States of America Generally Accepted Accounting Principles
WSS World Standard-setter Conference
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Ersa Tri Wahyuni
University of Manchester, Doctor of Philosophy
1st February 2016
IFRS vs US GAAP : Dispatches from the International Battlefield
Abstract The aim of this research is to develop an understanding of the rapid diffusion of IFRS
as a set of global accounting standards by studying in detail the process by which a
selected number of countries formally chose to adopt or converge to IFRS over US
GAAP. This study examines the IFRS adoption or convergence decision-making
processes in six countries, namely Philippine, Brazil, Canada, Indonesia, Japan and the
US. The research explores how the sampled countries made their decision to adopt or
converge with IFRS by analysing the events, the work of key actors and the arguments
that precipitated and bolstered such decision making. In considering countries where the
option was arguably to choose between one of two ‘quality’ sets of accounting standards,
the paper provides a valuable opportunity to consider the extent to which the case for
quality (so often made in support of the value and rise of IFRS) was influential in the
adoption process and the extent to which other factors played a significant role. This study argues that it is the idea of ‘one global accounting standard’ which has
been diffused and not only just IFRS. Countries opposing IFRS adoption face the risk of
being alienated by the IFRS international community, thus several have purported to
support the idea of ‘one global accounting standard’, although that may not necessarily
indicate IFRS adoption. This study finds that technical accounting issues, comparing the
quality of both standards, did not dominate the debate during the decision making process,
but other factors such as maintaining (or advancing) their international influence have
been dominant reasons for choosing IFRS in most sample countries.
This thesis develops a new analytical framework by depicting the adoption process of
IFRS as an ongoing engagement of interested actors who exert different types of
institutional work during the four stages of adoption: harmonisation, decision, transition
and implementation. The framework, serves to develop existing institutional work theory
(Lawrence and Suddaby, 2006), shows that distruptive, creating, and maintaining
institutional work are not wielded autonomously but rather are interconnected with each
other and they are capable of evolving over time. Focusing on the work itself and not the
institutional outcome, the framework reveals a less deterministic causal relationship
between one particular institutional work and its intended outcome. This study is hoped to
encourage the development of such theory in accounting standard-setting contexts.
Empirically, a developing global isomorphism of national standard-setters forms is
identified by this study as an evident implication of IFRS adoption. Upon adoption of
IFRS, national standard-setters are becoming more similar in their governance and due
process, mimicking the IASB model. The need to survive upon surrendering most of their
authorities to the IASB, is also arguably encouraging the emergence of regional groups of
national standard-setters, which in turn may evolve to become a new regulatory field
operating within and between the international and national regulatory fields. Such
developments have a number of important implications in respect of the development of
future research and regulatory policy in the area of international standard settings.
Keywords : IFRS, US GAAP, Institutional Work, Convergence, Adoption
Page 13 of 307
Dedicated to my mother and my late father
Thank you for your encouragement and constant support
Page 14 of 307
Acknowledgement
This PhD has been a challenging and rewarding journey. The list of institutions and
people below deserve thanks and appreciation for the completion of this thesis:
1. To the Indonesian Ministry of Education and Padjadjaran University, thank you for the
funding support which without I would not have been able to complete this journey;
2. My two supervisors, Prof. Christopher Humphrey and Prof. Edward Lee, thank you for
the guidance, knowledge and motivations during my PhD. You both pushed me
beyond my comfort zone, shaking my confidence, so I could achieve a higher level of
thinking and understanding;
3. To the Indonesian Institute of Accountants. For the access of your network of
standard-setters and research material for this study;
4. My husband and my two daughters, thank you for all of your patience and the
opportunity to have plenty of moments of solitude for me to finish the thesis;
5. I cannot thank enough Rosita Uli Sinaga, the chairwoman of the Indonesian Financial
Accounting Standard Board for her motivations, insights and moral supports;
6. I received a tremendous amount of support from the Executive Director of PICPA
(Philippine Institute of Certified Public Accountants) during my fieldwork in the
Philippines and the ASBJ (Accounting Standard Board of Japan) during my fieldwork
in Japan;
7. I am humbled by the positive responses I received from all respondents. Many of
whom I have developed a close friendship with after interviewing them;
8. I thank Prof. Roy Suddaby, Prof. James Faulconbridge, Prof. Laura Empson, Prof.
Frank Mueler and Prof. Daniel Muzio for their feedback during the Masterclass
Workshop in Newcastle Business School, June 2014. Also thank you to Prof.
Masayoshi Noguchi and Prof Niamh Brennan for their feedback during the APIRA
Doctoral Colloquium and to the discussant and all participants at the APIRA
Conference in Kobe, June 2013 and to the Indonesian Student International
Convention in London, November 2013;
9. My huge thank to fellow PhD students who gave support and motivations throughout
my PhD journey: Nurul Hidayah, Zubir Azhar, Hiroyuki Suzuki, Fareesa Malik, Lia
Nazlia,Qin Ye, Waziri Sulu-Gambari, Mirta Amalia. Also friends at Hartley Hall who
became my family in Manchester especially Vyta Hanifah;
10. Last, but not least, I thank other professors in the Accounting and Finance Division of
AMBS and Lynne Barlow-Cheetam and her team in the PGR office for the excellent
support during my PhD.
Chapter 1. Introduction
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Chapter 1. Introduction
1.1 Background
The world capital markets have become so interdependent that the instability of one
capital market can frequently affect others. Faster globalisation and the increased mobility
of capital have increased the pressure and demand for the harmonisation of reporting
frameworks and related standards (UNCTAD, 2006). The need for global financial
reporting standards to support the stability of globally connected financial markets is
argued to be critical for the sound functioning of the underpinning international financial
infrastructure (UNCTAD, 2006; Humphrey et al., 2009; Arnold, 2012). The world has
witnessed the diffusion of International Financial Reporting Standards (IFRS) over the last
15 years to a point where they have become a globally accepted accounting standard. The
scale of IFRS adoption is such that is now required or permitted by 126 jurisdictions for
the financial corporate reporting of all or most of their publicly listed companies
(Hoogervorst, 2015).
The need for a global set of high-quality financial reporting standards has long been
discussed by international bodies and the accounting professions. For example in Europe,
the European Commission (EC) started an initiative in the mid-1960s to harmonise
national regulations and improve the comparability of financial statements (Botzem and
Quack, 2006). The process of international convergence towards a global set of standards
was formalised in 1973 when sixteen professional accountancy bodies from nine countries
agreed to form the International Accounting Standards Committee (IASC), reorganised in
2001 to form the International Accounting Standards Board (IASB), in order to develop a
set of global accounting standards and related interpretations (see Camfferman and Zeff,
2007; Botzem, 2012).
Despite the proliferation of IFRS, the mechanisms employed by countries in the
adoption of IFRS are little understood, particularly when the countries have been in a
position where they had the capacity to make a choice between two allegedly high quality
Chapter 1. Introduction
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accounting standards. The broad aim of this thesis is to understand the rapid rise of IFRS
as a set of global accounting standards by studying in detail the processes by which a
selected number of countries chose to adopt IFRS over the alternative. The sampled
countries in this study are those who had a choice -- they had the choice to choose IFRS or
the alternative. Option in some countries could have been to adopt US GAAP and in
others where adopting US GAAP were not practicable, they could have continue to use
their local GAAP which also have been harmonised with US GAAP. Specifically, this
study aims to investigate how the decision to adopt IFRS emerged, who the actors were,
their actions, and the arguments precipitating their decision.
IFRS and the IASB have been the object of analysis for a considerable period of time
in accounting research. Evidence of the market consequences of IFRS adoption has
dominated capital market research in the last decade (see Brüggemann et al., 2013 for an
overview). IASB as a standard-setter has been the subject of institutional research in the
global standard setting literature (Botzem and Quack, 2006; Botzem, 2012; Richardson
and Eberlein, 2011; Zeff, 2012). Case studies on IFRS adopting countries, which are
mostly developing and ex-socialist countries, have provided limited empirical analysis of
IFRS adoption (Tyrrall et al., 2007; Albu et al., 2011). Often the case studies of IFRS
adoption in individual countries have argued that IFRS adoption was inevitable due to the
pressure of international donor bodies (Artikis et al., 2010; Tyrrall et al., 2007; Mir and
Rahaman, 2005; Junaid and Ghani, 2005). The benefits of IFRS adoption have been
promoted by international bodies such as the United Nations and the World Bank, with
claims including reduction in company’s cost of capital, greater mobility of capital and
improvements in the quality of accounting information (World Bank, 2010; UNCTAD,
2006).
There is a growing body of literature examining the quality of accounting information
associated with the adoption of IFRS. The research to date however, provides mixed
evidence as to whether accounting data from the IFRS system exhibits higher quality than
that associated with the application of local Generally Accepted Accounting Principles
(GAAP) or US GAAP. Although some research provides evidence that IFRS produces
better quality accounting information compared to local GAAP (Barth et al., 2008; Horton
et al., 2013; Daske et al., 2008; Lee et al., 2008), the evidence is less clear if it is tested
Chapter 1. Introduction
Page 17 of 307
against US GAAP. Research findings have tended to suggest that IFRS is not better in
quality when compared with US GAAP. If companies convert from US GAAP to IFRS,
accounting quality dimensions (inter alia value relevance, earnings management,
timeliness) have been found to remain unchanged (Bartov et al., 2005; Leuz, 2003) or
even deteriorate (Van der Meulen et al., 2007; Barth et al., 2012). The existing empirical
literature on the quality of IFRS versus US GAAP delineated above relies on extracted
corporate data from financial reports and capital markets. In essence, studies tend to
analyse the IFRS adoption impact at a firm level and not at the level of the individual
country. Most of the companies in such studies have not had a choice of using IFRS as the
country in which they are domiciled made the decision for IFRS adoption. However it
remains unclear why some countries switched from their national accounting regime to the
international accounting regime and what cost benefit calculations were performed. Indeed
in some cases, jurisdictions have adopted IFRS without even knowing the final form of the
standards to which they were committing, for example the case of the EU’s surprising
decision in June 2000 to require IFRS for all listed companies by 2005 (Zeff, 2012). When
the EU made this decision, the IASC was in the process of restructuring to become IASB
and the success of the new board was unknown. Thus, case studies of IFRS adoption are
potentially important to reveal the reasons behind such switching.
Existing case studies of individual country adoption of IFRS have mainly been
situated in the context of developing countries. Such countries may be more willing to
accommodate pressures for change due to capital dependency and the lack of an
accounting standard setting infrastructure. Countries covered in such literature on IFRS
adoption include Bangladesh, Pakistan, Egypt, Kazakhstan, Romania and Zimbabwe.(Mir
and Rahaman, 2005; Junaid and Ghani, 2005; Tyrrall et al., 2007; Albu et al., 2011;
Hassan, 2008; Hussey and Ong, 2006; Chamisa, 2000). In most of these studies, authors
have argued that coercive force has been the major factor in the IFRS adoption process.
However, the adoption of IFRS by the EU or other developed countries such as Canada or
Australia cannot be conveniently explained by theories of external coercive pressures.
These developed countries are clearly less dependent on the form of international aid that
imposes compliance with IFRS as a condition of the funding agreement.
Chapter 1. Introduction
Page 18 of 307
A study of the IFRS adoption process in several countries, including some developed
economies, is important in order to make sense of IFRS diffusion as a global accounting
standard. It is pivotal to understand why IFRS can be diffused in an arguably short period
of time while other standards, despite wide spread endorsement from transnational
organisations have been diffused at a much slower rate. An example is the slower adoption
of IPSAS by countries despite the endorsement of various international organisations,
including the EU.1Thus a better understanding of the process of IFRS diffusion may help
to inform similar efforts towards international standardisation in other fields such as
IPSAS, the recently emerged framework for integrated reporting, or Country by Country
(CbC) reporting2.
Currently, there are several prominent explanations in the literature as to why IFRS
has been widely diffused. The first common explanation for IFRS diffusion is the realist
perspective that argue that IFRS have been diffused through capital dependency and as a
new technological tool for developed countries to use to dominate developing countries
(Aras and Crowther, 2008; Nnadi, 2012; Bakre, 2008). The second explanation, is that
IFRS as well as other international standards, are diffused due to the financialisation of the
world, especially after the Asian Crisis in 1998 (Humphrey et al., 2009; Humphrey and
Loft, 2009; Arnold, 2012; Wade, 2007). The third explanation for countries to adopt IFRS
is to seek legitimacy and social acceptability regardless of their usefulness, or a country
‘isomorphing’ with predominant norms (Rodrigues and Craig, 2007). Isomorphism is a
key element in the institutional theory and widely used in IFRS case studies. (Collin et al.,
2009; Hassan, 2008; Mostafa Kamal, 2008; Mir and Rahaman, 2005; Albu et al., 2013;
Albu et al., 2011).
Surprisingly, the various streams of literature rarely make reference to one another.
Those analysing IFRS diffusion at a global level usually accentuate the transnational
organisational interplay, and how international organisations improve the legitimacy of
1 The slow adoption rate of IPSAS has encouraged five transnational organisations: OECD, IMF, World
Bank, FSB, IOSCO, and INTOSAI to review the governance of IPASB and issue the public consultation
paper in February 2014 : http://www.oecd.org/gov/budgeting/IPSASB-Consultation-Paper.pdf
2CbC reporting is Country By Country reporting, initially proposed by UK tax consultant Richard
Murphy, and now under consideration by the OECD and the EU. The EU issued new accounting directive in
June 2013 about CbC and OECD issued consultation paper in January 2014:
http://www.oecd.org/ctp/transfer-pricing/discussion-draft-transfer-pricing-documentation.pdf
Chapter 1. Introduction
Page 19 of 307
particular sets of standard and precipitate the diffusion. Often they neglect the processes
inside countries as an important institutional work in promoting IFRS diffusion. In
contrast, IFRS country case studies are caught up in explaining the legitimacy motives of a
country, and rarely perceive the country as a relevant player in the international arena. The
case studies using an isomorphistic explanation have paid little attention to issues of
contestation, and the process and influence in international standard-setting process
(Botzem and Quack, 2006).
It can be argued that globalisation has created the demand for one global accounting
standard and IFRS adoption has been promoted as the way to achieve that goal (Pacter,
2014; Tweedie, 2012; UNCTAD, 2006). Extant research provides evidence that IFRS
produces better accounting information compared to local accounting standards only in
certain circumstances and does not always compare favourable with the US GAAP (see
Brüggemann et al., 2013; Tarca, 2012 for an overview). Such studies tend to be dominated
by cases where the alternative to IFRS adoption was to maintain a vividly inferior national
GAAP. There have been few studies of IFRS adoption where an alternative adoption of a
competing set of quality standards was potentially available.
Drawing from world society theory (Drori et al., 2006b), this study argues that IFRS
diffusion is the part of world’s cultural consolidation in the era of global social change. In
contrast with the realist perspectives3 which see globalization as exploitation, domination,
competition, and manipulation; world society theory offers an alternative image of
globalisation which involves an increasing sense that the world in itself is a society with
its own social system and culture. This thesis argues IFRS has been globally diffused
because the idea of ‘one global accounting standard’ over thirty years has become a part of
world culture. It is not only IFRS as a set of standard per se, but the idea of ‘one set of
global accounting’ standards that has travelled and been embraced by many countries.
IFRS happens to have taken as the reification of that idea. As will be discussed in the
empirical chapters, countries have chosen IFRS, not necessarily due to the pressure from
3 such as world-system theory Chase-Dunn, C. K. (1998) Global Formation: Structures of the World-
Economy. Lanham: Rowman & Littlefield, Wallerstein, I. (1974) The Modern World-System I: Capitalist
Agriculture and the Origins of the European World-Economy in the Sixteenth Century New York: Academic
Press and state-competition theory Tilly, C. (1992) Coercion, Capital, and European States, Ad 990-1992.
Oxford: Blackwell Publishing. Skocpol, T. (1979) States and Social Revolutions: A Comparative Analysis of
France, Russia and China: Cambridge University Press.
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international donor bodies, but to become part of global society. Even countries opposing
IFRS adoption face the risk of being alienated by an emerging IFRS global society thus
they may need to purport their support for the idea of ‘one global accounting standard’
although not necessarily indicate IFRS adoption.
This study argues that IFRS adoption is not a clear-cut sequential process but an
ongoing engagement of different forces and actors amidst continued transformation in
national and international regulatory fields. In analysing the six sample countries, this
study develops an analytical framework of dynamic processual change that is
distinguished from the current existing hierarchical models (Dillard, et. al., 2004)
commonly used in analysing IFRS adoption processes (e.g Guerreiro et al., 2015; Irvine,
2008). Drawing on the notion of institutional work (Lawrence and Suddaby, 2006;
Lawrence et al., 2009), the analytical framework facilitates a richer insight into of the
political tensions across different stages of IFRS adoption and takes the analysis beyond
the ubiquitous institutional isomorphism explanations offered by much existing literature
on IFRS adoption.
In so doing, the study serves to develop the analytical framework introduced by
Lawrence and Suddaby (2006) by finding a less deterministic set of linkage between
certain types of institutional work and the intended effects of the work. Such a framework
allows for the fact that particular institutional work may not necessarily correspond
directly with specified institutional outcomes. As will be discussed in chapter ten, some
forms of what have been termed creating and disrupting work have been successful in
some countries but not in others. For example, the creating work of actors in promoting
the notion of ‘one global accounting standard’, has not necessarily lead to a full IFRS
adoption in Japan and the US. Such use of institutional work to illustrate the dynamics of a
field change contributes to the current discussion of the theory which have tendency to
tightly couple forms of institutional work with their intended outcome. (e.g Hirsch and
Bermiss, 2009; Trank and Washington, 2009; Suddaby and Viale, 2011). The case studies
using institutional work theory have usually started with a certain outcome (e.g the
creation of a new field) then investigated how the institutional work contributed to the
outcome (e.g Zietsma et.al., 2010; Hirsch and Bermiss, 2009;Trank and Washington,
2009; Suddaby and Viale, 2011).
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The analytical framework proposed in this thesis (as will be discussed in chapter ten)
also stresses the importance of recognising the interdependent relationship between
international and national fields. The decision and actions of national actors can be highly
influenced by the logics and dynamics of the international field. Through the movement of
actors across/between the two fields, the logics in the international field are cascaded to
the national field and vice versa – with the national actors are being capable of influencing
IFRS policy-making through their representation. The diffusion of international logics to
the national field has brought other institutional implications besides the adoption of IFRS.
The IFRS diffusion has encouraged the global isomorphism of organisational structures
and processes, transforming the national standard-setters to become more similar in their
forms and due processes. Such institutional developments have been overlooked by the
current IFRS literature and will be discussed toward the end of this thesis when
consideration is given to the emerging significance of regional institutional fields in
accounting standard setting.
1.2 Research objectives
The primary objective of this study is to understand how IFRS has been adopted by
different countries to enhance knowledge of the global diffusion of IFRS. This study aims
to go beyond how countries have made the decision to adopt or converge with IFRS by
analysing the activities, the actors and the arguments precipitating the decision to adopt
IFRS.
In achieving the aims of the research, this study will analyse IFRS adoption in several
countries where the national actors have contemplated to choose IFRS over other allegedly
good quality international standards. Comparative case studies of six countries will
provide a more comprehensive understanding of IFRS diffusion globally, as these six
countries represent both developing and developed economies. All the sample countries,
except for the US and Japan, at some point of time they have made decision to abandon
US GAAP and fully adopt IFRS. The comparative case studies are used to answer three
broad research questions:
Chapter 1. Introduction
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Research Question 1: How did the decision to adopt (or not to adopt) IFRS emerge in
these 6 selected countries, which actors were involved in the process and what factors both
endogenous and exogenous, determined the decision?
Research Question 2: How prominent were arguments about the relative quality of
IFRS vs. US GAAP (or the local GAAP) in debates over IFRS adoption and did other
issues have greater prominence?
Research Question 3: What can be gained from detailed investigation of the process
of IFRS adoption in individual countries in terms of:
a. better explaining the processes through which IFRS has become a global
accounting standard; and
b. improving our understanding of institutional change and the dynamics of
institutional work in the regulatory field?
1.3 Research methodology
The design of this research adopts a qualitative interpretative approach to gain an in-
depth understanding of IFRS adoption processes. The six countries selected in this study
are the Philippines, Brazil, Indonesia, Canada, Japan and the US. The main criterion used
in selecting the sampled countries was their past strong connection with US GAAP prior
to their contemplation of IFRS adoption. Arguably, a country which had a strong faith in
US GAAP (often labelled as a rule-based set of standards) would experience quite an
onerous and challenging decision-making process in adopting IFRS, which is claimed to
be a principles-based set of standards.
The documentary study of this research analyses information from World Bank
reports, press releases, speeches, minutes of meetings of national standard-setters, meeting
podcasts, articles in newspapers and magazines, and other relevant material. These
documents were used to develop a timeline for each country and also to identify the
dominant actors involved in that process. In order to understand the actions and the contest
among actors, semi-structured interviews with the decision makers were conducted. Key
decision-makers from national accounting standard-setters, capital market supervisory
agencies and the accounting profession are the main respondents for this study. The
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interview with 63 respondents across six countries were used for several purposes. Firstly,
interviews were used to confirm the timeline of IFRS adoption. Secondly, interviews were
used to confirm the key individuals (or group of individuals or institutions) involved in
discussions leading up to the decision-making process for IFRS adoption. Thirdly,
interviews with several key individuals were used to gain an understanding of how the
decision was made and its consequences were considered.
All interviews were then coded and analysed based on the emergent categories. The
interviews were triangulated with other data such as reports, news articles and other
respondent’s interview to refine the themes. The theoretical coding was then employed to
categorised data based on the theoretical framework. The researcher interpreted the
meaning of themes/descriptions to develop new understandings and analytical framework
for IFRS adoption process.
1.4 The layout of the thesis
This thesis consists of eleven chapters which are structured as follows:
This current introductory chapter provides the general background of and motivations
for the study.
Chapter two provides a historical delineation of the rise of IFRS as a set of global
accounting standards. This chapter starts in the era of the 1960s when the pursuit of global
accounting standards was discussed by international bodies and the accounting profession
around the world. The chapter also notes important milestones in the global diffusion of
IFRS in the decade from1998 to 2008. It concludes by discussing the position of IFRS as a
set of global accounting standard following the global financial crisis of 2007 – 2008 and
reviews the current position of IFRS.
Chapter three’s specific purpose is to identify key gaps in the current literature of IFRS
research. Its first section delineates the mixed research evidence on the question as to
whether IFRS produces better quality accounting information, especially compared to US
GAAP. Section two explicates various individual country case studies of why countries
adopt IFRS. Most existing case studies argue that pressures from international bodies have
dominated the decision making process, although the institutional change and mechanisms
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of IFRS adoption have been rarely explored. The final section reviews the extant literature
on institutional issues in the politics of accounting standard-setting processes. The current
literature is dominated by the case of IASB and FASB, both are well resourced standard-
setters with significant global influence. However the literature has offered little
explanation on how national regulatory fields institutionalise IFRS which has been pivotal
in supporting the IFRS global diffusion.
Chapter four explains the theoretical framework which will be used in analysing,
presenting and discussing the empirics of the study, concentrating in particular on world
society theory and institutional work theory. World society theory offers different
explanations for globalization – not viewing it as an outcome of exploitation, but as
reflection of an increasing sense that the world itself is a society with its own social
systems and culture. While world society theory is helpful to explain the diffusion of IFRS
globally, the theory of institutional work is helpful to analyse the national regulatory field
level. Institutional work theory offers different analytical framework in looking at
institutional change by focusing on the purposive actions of actors which can be creating,
maintaining and disrupting. These two theories have been useful in sense-making and
understanding the multiple cases in this study.
Chapter five focuses on the study’s research methodology, explaining its ontological
and epistemological stances and justifying its interpretative approach. The chapter then
explains the criteria used for country selection and how respondents were selected from
each country as well as how the resulting empirical data was analysed.
Chapter six to nine are the main empirical chapters of the study. Chapter six examines
how the IFRS adoption processes in Brazil and the Philippines were shaped by
international forces, albeit in different ways and in ways that are not consistent with a
classic coercive isomorphism explanation. Chapter seven analyses IFRS adoption
processes in Indonesia and Canada which, in contrast to Brazil and the Philippines, relied
more on the lobbying of national actors, resulting in longer process of decision making.
Chapter eight focused on the strategic re-positioning of Japan’s IFRS adoption decision,
while chapter nine analyses the case of the US, a country which arguably has had the
strongest debate on the respective quality of IFRS and US GAAP. This case also explores
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the emotive aspects of the international response to the US indecisiveness toward IFRS
adoption. The six cases collectively demonstrate that the power struggles between
different actors are an ongoing engagement capable of transforming national regulatory
fields.
Chapter ten brings together the discussion on how IFRS is diffused globally, using this
to develop theoretical understandings of the way which IFRS adoption transformed
national regulatory fields. This chapter uses the cases to develop an analytical framework
of IFRS adoption processes that refines existing theoretical framings of institutional work
categories by showing the evolution of institutional work over different stages and its
coterminous relationship across categories. The framework highlights the distinction
between institutional work and their intended institutional outcome by depicting a less
deterministic link between them.
Chapter eleven draws together the overall conclusions of the thesis and ennunciates
how the multiple case studies improves our understanding of IFRS diffusion. This chapter
also summarises the principal research findings of the study, focused particularly on
exploring emerging significance of regional fields in international accounting standard
setting. Lastly, the chapter proposes an agenda for future research.
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Chapter 2. The Rise of IFRS4
‘The best is still to come and that will be when the
Americans say: ‘Yes’” – Sir David Tweedie, answering
the question as to what the best times was in his ten years
as chairman of the IASB in an interview with Deloitte’s
IASPlus, 24th June 2011.
2.1 Introduction
Globalisation creates the demand for worldwide standards. In modern life, especially
after the second world war, standards have flourished (Brunsson and Jacobsson, 2000). In
several areas, private bodies have emerged as transnational rule-makers to provide global
standards as common goods to support the global economy. Private non-governmental
standard-setters, which often consist of self-appointed experts, are becoming increasingly
important actors creating and enforcing global ‘order’. Examples include the International
Organisation for Standardisation (ISO), the Internet Corporation for Assigned Names and
Numbers (ICANN) and the Global Reporting Initiative (GRI). These bodies establish rules
and make decisions that are recognised as authoritative, even if they are technically
voluntary and not legally binding (Richardson and Eberlein, 2011).
The rise of IFRS is often linked to globalised capital markets. The rapid diffusion of
IFRS over the last 15 years, resulting in it becoming a global standard, owes its success to
global marketisation logic (Djelic, 2006; Botzem and Quack, 2006). IFRS has been
marketed by intergovernmental organisations such as the World Bank and IOSCO as the
high quality global accounting standard which will enhance efficiency across capital
markets and deliver the decreased of cost of capital (UNCTAD, 2006). Besides IFRS,
standards serving the global business world include quality standards (ISO 9000),
International Standards on Auditing (ISA) and standards for sustainability reporting
(GRI).
4 When the IASB was formed in 2001, it co-opted all standards issued by IASC (IAS) into IFRS.
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The fast diffusion of IFRS is unique compared to other global standards such as ISO
9000, and ISA. IFRS has been produced by few full time Board members hired by IFRS
Foundation which is not an association of national accounting standard-setters. Unlike
ISO (International Organisation for Standardisation) which is the organisation of national
standards organisations or IFAC (International Federation of Accountants) which is the
organisation for national accounting professional associations, the IASB lacks formal
representation in its rule-setting activities. The ISO and IFAC produced their standards
based on the output of their part-time technical standard setting board/committees whose
members maintain their employment in their industry. In contrast, IFRS since 2001 has
been developed by a group of experts working full-time as standard-setters, supported by
full-time technical staff. One may argue that the IASB lacks legitimacy compared to other
meta-organisations or meta-government standard-setters, but the fast rate of IFRS
diffusion over the last 15 years to become a global standard demonstrates otherwise.
Standards have been described as voluntary agreements initiated and developed by
industry (Hallström, 2004). However, any standards which have reached a certain level of
‘global authority’, are difficult for other jurisdictions not to adopt (Richardson and
Eberlein, 2011).
The road to dominance in the international accounting standard-setting arena has not
been an easy one for IFRS, and not without its challenges. This chapter provides a brief
historical background on how IFRS has developed from a set of standards (that most
countries were reluctant to adopt), to now being adopted by more than 122 countries. This
chapter first looks at the reasons behind the pursuit of global accounting standards in the
1950s. The earliest period of IFRS (or IAS as they were known as back then) development
is discussed subsequently in the next section, highlighting the international institutions
involved in its development and diffusion. Section three explores the key milestones of
IFRS global rise over ten years (1998-2008) and the chapter concludes by considering
impact of the financial crisis in 2008 on the global diffusion of IFRS.
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2.2 The world pursuit of global accounting standards
Before the development of international trade and the integration of the world
economy, accounting standards were the product of a particular country which was
influences by its business and legal environment. However, the world witnessed rapid
growth in international trade and investment after the Second World War. By the late
1960s, a large majority of multinationals were American or British; comprising four-fifths
of the stock of foreign investors (Camfferman and Zeff, 2007 p.21). Barriers to trade and
investment were minimised by the formation of international trading blocs such as the
European Economic Community (EEC) in 1957.
As the international movement of investment increased, so did the need for accounting
harmonisation. Accounting professional bodies started to look beyond their national
borders and held conferences with other accounting bodies in the wider region. Meetings
of regional accounting bodies were held in Europe, America and Asia between the 1950s
and 1960s. At the Far East Conference of Accountants in Manila in 1957, several
accounting bodies formed the CAPA (Confederation of Asian and Pacific Accountants)
and at that conference, Washington SyCip (a leader of the Philippines accountancy
profession) called for more uniform standards. Similar call was also repeated in many
international accounting conferences after that, for example, at the seventh and eighth
International Congress of Accountants in 1957 and in 1962 (Camfferman and Zeff, 2007
p.23 and p.24). The president of the congress, Jacob Kraayenhof, highlighted the
divergence on auditing standards in various countries as a problem during the seventh
congress in 1952 and called for a uniformity of accounting principles during the annual
meeting of American Institute of Certified Public Accountants (AICPA) in 1959
(Camfferman and Zeff, 2007 p.23).
Prior to the call from the accounting profession, harmonisation of national accounting
standards found their way on to the agenda of international organisations. The OEEC
(Organisation of European Economic Cooperation) developed a standardised system for
national income accounts and began to publish data using those standards in 1953. At the
same time, the UN proposed a standardised system of its own, in order to produce
Chapter 2. The Rise of IFRS
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comparable national income accounts. The standards of the OEEC and the UN were then
merged in 1956 (Botzem and Quack, 2006 p.271).
In Europe, the European Commission (EC) started an initiative in the mid-1960s to
harmonise national regulations and improve the comparability of financial statements. The
Elmendorf Report was produced which then shaped the first draft of the EC’s Fourth
Company Law Directive submitted in 1971 (Botzem and Quack, 2006 p.272). Initially, the
drafts of the directive were highly influenced by German company law, but when the UK
and Ireland joined the European Union (EU) in 1973, they insisted that the essence of
Anglo Saxon accounting philosophy should be better reflected with Dutch, Danish and
UK delegations insisting on the inclusion of the principle of the true and fair view. The
EC’s Fourth Directive was approved in 1978, laying down requirements for companies
across the EEC to prepare annual accounts that provided a true and fair view. In 1983, the
Seventh Council Directive on consolidated accounts was adopted in the EEC (Botzem and
Quack, 2006 p.272)
In the 1970s, the UN became a more active player in the international accounting
standard-setting arena. In December 1971, during the International Labour Organisation
(ILO) conference in Turin (on universal standards and conventions in accounting), the UN
was said to consider a ‘summit of leading accountants’ for 1972 to discuss “the chaos of
international accounting methods” (Camfferman and Zeff, 2007 p.188). In 1972, a Group
of Eminent Persons was appointed by the UN secretary-general to study the impact of
multinational corporations on development and international relations. The UN
Commission on Transnational Corporations decided to form its own Group of Experts in
1975 which became a working group in 1979 and was called the “Ad Hoc Inter-
governmental Working Group on International Standards of Accounting and Reporting”
(Camfferman and Zeff, 2007 p.192).
While inter-governmental organisations were working towards the harmonisation of
accounting standards, professional accounting associations were working with a similar
goal in mind. In 1966, the President of Institute of Chartered Accountants of England and
Wales (ICAEW), Sir Henry Benson proposed the establishment of the Accountants
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International Study Group (AISG) which comprised of representatives of the accounting
professional bodies of the UK, Canada and the US. The aim of the AISG was to
strengthen private standard-setting as an alternative to supranational regulation such as the
EC (Botzem and Quack, 2006 p.274). Its work reflected the influence of Anglo Saxon
professionals with a liberal tradition of self-regulation and their efforts to open new
markets in continental Europe.
Sir Henry Benson and Sir Douglas Morpheth played a pivotal role in the establishment
of the IASC, the predecessor of the current IASB (Bocqueraz and Walton, 2006). At the
Tenth International Congress of Accountants in Sydney 1972, Sir Benson invited
professional bodies from six nations to establish the IASC. The Congress also became the
birthplace of the International Co-ordination Committee for the Accountancy Profession
(ICCAP), which subsequently became IFAC in 1977 (Humphrey and Loft, 2007) .
On 28th June 1973, the IASC was created by representatives of national professional
accounting bodies from nine countries: Australia, Canada, France, West Germany, Great
Britain (with Ireland), Japan, Mexico, the Netherlands and the US. Sir Henry Benson
became chairman of the IASC (Camfferman and Zeff, 2007 p.6). The emergence of the
IASC, marked a significant shift in the previously burgeoning development of
international regulation in the field of accounting. The IASC aimed to develop
international accounting standards instead of regional ones. Most importantly, the
accounting standard-setting arena was in the hands of private actors who previously
advised in a subordinate position to governmental decision-making bodies such as the EC
and the UN (Botzem and Quack, 2006 p.274) .
The IASC was transformed into the IASB when its member bodies unanimously
approved its restructuring on 24th May 2000 in Edinburgh (Camfferman and Zeff, 2007
p.496). By this vote, the IASC finally was separated from IFAC and became an
independent body (Camfferman and Zeff, 2007 p.496). The IASC which consisted of
representatives from IFAC member bodies was a similar quasi-legislative model to other
global standard-setters such as the ISO technical committees (Hallström, 2004), however,
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the evolution of the IASB in to a private body created a new quasi-judicial model in global
standard-setting.
2.3 International institutions involved in the diffusion of IFRS in its early period.
The early years following the establishment of the IASC represented the formative
stage of international accounting standard-setting. For a transnational standard to be
diffused, it needs input and output legitimacy. Output legitimacy is not solely sufficient as
it takes time to see if a standard works well especially in a global wide scale. Without
input legitimacy from a wide pool of stakeholders, a set of accounting standards may be
perceived as biased, self-serving and not international. Input legitimacy is argued to be
derived from stakeholder involvement in the process of standard formation (Botzem and
Dobusch, 2012 p.741). International standard-setters, especially those newly established
like the IASC, needed to generate input legitimacy by strategically engaging third parties.
Some international organisations, with a stronger political legitimacy such as the UN and
the EU, were also developing international accounting standards in the 1970s and
competing with IASC in creating cross-border regulation (Botzem, 2012). During 1970s
and 1980s, UN and OECD questioned the IASC’s primacy in setting international
accounting standards (Zeff, 2012 p.840). Both bodies viewed IASC lacked of legitimacy
as it was a creature of the accounting profession with its own perceived narrow self-
interest (Zeff, 2012 p.841).
At the time of its establishment, IASB decided to cooperate with other international
organisations which were also trying to create internationally recognised accounting
standard. The IASC, for example, was represented at all meetings of the UN working
group ISAR (Intergovernmental Working Group of Experts on International Standards of
Accounting and Reporting) throughout the 1980s (Camfferman and Zeff, 2007 p.192).
The IASC also maintained regular contact with the OECD and its working group on
accounting standards throughout the 1980s and into the early 1990s (Camfferman and
Zeff, 2007 p.194).
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In the early years of their establishment from the mid-1970s to the early 1980s, the
IASC cooperated with many other international bodies such as the ‘Group of Ten’ Bank of
Governors at the Bank for International Settlements (BIS) in developing financial
reporting rules for their internationally active banks. Besides the UN, OECD and BIS, the
IASC also sought to improve its relations with other national standard-setters by launching
joint projects with standard-setters from the Netherlands, the UK and the US (Botzem and
Quack, 2006 p.276).
The IASC also tried to improve its input legitimacy by inviting other stakeholders to
become voting members and observers. Constitutional amendments in 1977 and 1982
expanded IASC membership to a total of seventeen members from only nine in 1973.
Organisations with an interest in financial accounting like the Association of Financial
Analysts (AFA) and the Association of Financial Executives (AFE) had reserved seats in
the IASC starting in 1986 and 1996 respectively (Botzem and Quack, 2006 p.277). The
pursuit of inclusiveness in standards formation by the IASC was also illustrated by the
establishment in 1981 of its Consultative Group which included various international
organisations to advise the IASC on strategic projects and priorities.
The IASC’s Consultative Group was a major step towards expanding its reach to
international non-accounting bodies. While the UN and the OECD both declined formal
membership, but the first consultative group contained representatives of the following
international bodies (Camfferman and Zeff, 2007 p.86):
- Federation Internationale des Bourses de Valeurs (FIBV)
- International Chamber of Commerce (ICC)
- International Confederation of Free Trade Unions
- International Co-ordinating committee of Financial Analysts’ Associations
- The World Bank
The Consultative Group notably proved its worth in improving the legitimacy of the
IASC during the OECD Forum on Harmonisation of Accounting Standards in 1985. A
number of individuals who expressed their support for the IASC during that conference
were also members of the Consultative Group. These members made a significant
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contribution to the enhancement of the IASC and increased its legitimacy in the eyes of
the OECD (Camfferman and Zeff, 2007 p.87).
As the input legitimacy of IAS improved, the output legitimacy became equally
important in expediting diffusion of the standard. Output legitimacy, has been argued,
results from the effectiveness and coordinative capacity of a standard (Botzem and
Dobusch, 2012), something that IAS was lacking at that time. As a group of accounting
professionals, the IASC could only persuade their members to use the standard and were
unable to enforce it. For example the AICPA was one of the founders of the IASC, but the
Financial Accounting Standards Board (FASB) remained the accounting standard-setter in
the US. Similarly in Japan, where the JICPA (Japanese Institute of Certified Public
Accountant), was a founding founder of the IASC, but had a relatively weak level of
influence on the standard-setting process in Japan (Camfferman and Zeff, 2007 p.172).
The IASC reported in 1988 that none of the founding members of the IASC had adopted
any of the IASC’s standards as their national requirements--suggesting as they had little to
learn from the IASC (Camfferman and Zeff, 2007 p.181). Thus, it was important for a
third party with a strong enforcing power to endorse the standards. Third parties play a
pivotal role in standard diffusion by endorsing and requiring or even insisting upon
adoption of IAS by its members (Botzem and Dobusch, 2012).
During the second half of the 1980s, the IASC targeted national regulators of
securities markets and approached IOSCO with the aim of establishing financial
statements prepared according to international accounting standards as a requirement for a
company’s access to the national/global stock market. IOSCO, created as an inter-
American organisation in 1974, which developed into a powerful global player by the
mid-1980s (Botzem and Quack, 2006 p.278) . Thus, seeking IOSCO recognition was
important for IAS legitimacy. Taking a similar stand to the FASB and the US SEC,
IOSCO was critical of IAS on the grounds that the language was incoherent, according to
them and lacked transparency (Botzem and Quack, 2006 p.278). Thus, it was important
for the IASC to improve the quality of their standards in order to gain IOSCO approval.
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The first project between the IOSCO and the IASC which started in 1987 aimed at
reducing or eliminating alternatives within standards and making them more detailed and
prescriptive. As part of this project, 10 out of 31 IAS standards published before 1987,
went through revision and the IOSCO played a tough vetoing role throughout the project
period (Botzem and Quack, 2006 p.279). The revised version of IAS published in 1993
produced 14 acceptable standards which received endorsement by European members of
IOSCO but the US Securities Exchange Commission (SEC) wanted to recognise and
endorse IAS only when a complete set of core standards was ready. Thus, in 1993 the
IASC and IOSCO started another revision project to create acceptable core standards by
1998. Finally in 2000, IOSCO recommended its members to allow the use of IAS in cross-
border offerings and listings. IOSCO endorsements provided significant support to the
IAS output legitimacy in that early period.
By the end of 1999, IASC agreed to restructure itself as demanded by the US SEC
(Zeff, 2012). Instead of a council of 60-70 people representative from various countries,
international accounting standards were developed by a small number of people hired by a
IFRS foundation incorporated in the US and headquartered in London. By the end of
2000, the standards produced by the IASC had become one of the standards being
reviewed for compliance by the IMF-World Bank assessment programme to the banking
sector. The growing acceptance by countries across the globe of IFRS is being used by
some to suggest that IASB is a model for transnational standard-setting (Richardson and
Eberlein, 2011).
2.4 Important milestones in the diffusion of IFRS (1998-2008)
There were many factors contributing to IFRS diffusion over the past 15 years. Major
milestones include the Asian financial crisis in the mid-1990s, the adoption of IFRS by the
EU in 2005 and the SEC decision in 2007 to accept IFRS-based financial reporting for
foreign companies listed in the US. Those three milestones made significant contributions
to the rise of IFRS.
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The idea of global accounting standards developed since the inception of the IASC in
1973, but it was not until the Asian financial crisis that the international agencies such as
World Bank really made global accounting standards a matter of priority. The importance
of the Asian financial crisis in the mid-1990s as the catalyst for the creation of a new
financial infrastructural regime, resulting in the demand for better global accounting
standards, has been highlighted in various studies (Humphrey and Loft, 2009; Arnold,
2012; Wade, 2007)
The Asian financial crisis began in Thailand in 1997 with the devaluation of the Thai
Baht due to speculation by short term investors. The crisis spread very quickly to
neighbouring countries with weak currencies such as the Philippines, Indonesia and
Korea. The Asian financial crisis soon became a global crisis as it also had an impact on
US hedge funds, the Russian debt crisis in 1998 and the Brazilian currency crisis in 1999
(Wade, 2007). Several countries like South Korea, Brazil, Thailand, Indonesia did not
have a choice but to accept IMF rescue programmes (Wade, 2007; Arnold, 2012).
The seriousness and the scale of the crisis led to widespread consensus among western
economies, world policy analysts, politicians and finance ministers regarding the need to
reform the international financial system, thus the G7 was established in October 19985.
The G-7 or Group of 7 was a group of finance ministers and central bank governors of
seven developed countries: Canada, France, Germany, Italy, Japan, the UK and the US.
Four months after the October meeting, G7 finance ministers and central bank governors
agreed to create another forum, the Financial Stability Forum (FSF), to promote
information exchange and coordination among national authorities, international
institutions, and international regulatory experts. The FSF had more representatives than
the seven nations which formed the first G7, it included Australia, Hong Kong, Singapore,
and Netherlands.
G7 countries, in a declaration dated 30 October 19986, proposed numerous measures
including the call on the IASC to finalise by early 1999, a proposal for a full range of
5 G7 Statement on the world economy, Declaration of G7 Finance Ministers and Central Bank Governors, London, 30 October 1998. Available at: http://www.g8.utoronto.ca/finance/fm103098.htm (Accessed 30th December 2014) 6 Ibid.
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internationally agreed upon accounting standards. They also requested that IOSCO, IAIS
(International Association of Insurance Supervisors), and the Basel Committee should
complete a timely review of the standards. Although the IASC had established contacts
with the Basel Committee and the World Bank for many years, this declaration,
nevertheless, was an important enhancement of the IASC’s position in the international
financial arena (Camfferman and Zeff, 2007 p.442)
The FSF duly conducted several meetings to discuss the setting of standards for the
new financial infrastructure. By September 1999, The G7 had expanded into
representatives from 20 countries which then became known as the G20. In March 2000,
the G20 agreed to focus attention on twelve key international standards: IFRS set by the
IASC and auditing standards set by the IFAC were among the 12 key international
financial standards (Table 1 lists these standards and their respective issuing bodies).
Area Standard Issuing Body
Macroeconomic Policy and Data Transparency
Monetary and financial policy
transparency
Code of Good Practices on transparency
and financial policies
IMF
Fiscal Policy and
Transparency
Code of good practices on fiscal
transparency
IMF
Data Dissemination Special Data dissemination standards and
General data dissemination standards
IMF
Institutional and Market Infrastructure
Insolvency Insolvency and Creditor Rights World Banks
Corporate Governance Principles of Governance OECD
Accounting International Accounting Standards IASB
Auditing International Auditing Standards IFAC
Payment and Settlement Principles for financial market
infrastructures
CPSS/IOSCO
Market Integrity FATF Recommendations on Combating
Money Laundering and the Financing of
Terrorism & Proliferation
FATF
Financial Regulation and Supervision
Banking supervision Core Principles for Effective Banking
Supervision
BCBS
Securities regulation Objectives and Principles of Securities
Regulation
IOSCO
Insurance supervision Insurance Core Principles IAIS
Table 1. The Financial Stability Forum’s 12 key standards for sound financial
systems
Source: http://www.financialstabilityboard.org/cos/key_standards.htm Accessed on 4th November
2013
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These 12 standards were important as they were to become the basis for the IMF and
the World Bank in their joint country-by-country assessment. By this inclusion, it was a
clear signal that the IASC was now taken seriously at governmental level in the developed
world (Camfferman and Zeff, 2007 p.443). As part of the IMF-World Bank Financial
Sector Assessment Program (FSAP), these international bodies were charged with the
responsibility of monitoring countries’ implementation and compliance with the FSF’s 12
standards and codes. The IMF and World Bank upon conducting a detailed assessment of
progress developed their programme of Reports on the Observance of Standards and
Codes (ROSC). The international support for IFRS was also strengthened by IOSCO
endorsement in May 2000 for IASC’s core standards and Basel Committee in April 2000
for 15 IASC’s standards that had a significant effect on banks.
External pressures from international agencies such as the World Bank or the Asian
Development Bank (ADB) have been discussed in many case studies as one of the
dominant factors leading to IFRS diffusion in developing countries. (Hassan, 2008; Mir
and Rahaman, 2005). By 2013, as many as 98 countries had been assessed by the World
Bank and most of the resulting ROSC Accounting and Auditing Reports are available
from the World Bank website7. Over the last 12 years since 2001, 14 countries have been
assessed twice. The majority of the assessments have been conducted in developing
countries while the major advanced economies such as Germany, the UK, Japan and the
US are not assessed (or if they do, the reports are not available in the World Bank website)
which is ironic as the developed countries are the initiators of the assessment.
G20 recommendations have also been an influential factor for its members considering
the adoption of IFRS, and also for the IASB to revise its standards. For example, the G20
successfully pressured the IASB to revise its financial instrument standards after the
global financial crisis in 2008 (Bengtsson, 2011). During its second summit in London
April 2009, the G20 issued a leader’s statement with 29 recommendations to its members.
One of the recommendations was to strengthen financial supervision and the adoption of
IFRS.
7 ROSC Accounting and Auditing can be accessed at http://www.worldbank.org/ifa/rosc_aa.html
(Accessed 13 November 2014)
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“To call on the accounting standard-setters to work urgently with supervisors and
regulators to improve standards on valuation and provisioning and achieve a single
set of high-quality global accounting standards.” (G20 Leader’s statement para 15).
Beside the creation of a new financial infrastructure globally (Wade, 2007), the Asian
financial crisis also encouraged the emergence of new international actors, e.g FSF
became FSB and G7 became G20, who remain influential in the making of IFRS to the
present day. The rise of the G7 which then evolved into the G20, the creation of 12 key
standards and the FSAP/ROSC programme by the IMF and the World Bank fostered IFRS
diffusion, especially in Asian jurisdictions. Research by Alon and Dwyer (2014)
highlights that the majority of early adopters moved to IFRS after 1998 when a number of
countries received aid from the World Bank and IMF as a consequence of the Asian
financial crisis.
Following soon after, The EU boldly chose to endorse IFRS as an accounting standard
which united the continent’s capital markets. The adoption of IFRS by the EU in 2005
became a major milestone marking an increase in the rate of IFRS diffusion. The IASB
had the support of the EU from the beginning of its establishment in 2001. Since the mid-
1990s, discussions started in the EU about the need to develop its internal capital market,
and to address investor needs (Zeff, 2012). Thus the need for comparable accounting
practices arose as a major issue (Zeff, 2012). There was considerable diversity across the
EU (15 GAAPs in the 1990s, increasing with subsequent expansion) despite member
states incorporating the fourth and seventh directives into their national legislations and
those national traditions mainly were not “investor-oriented financial reporting systems”8.
The idea of a European Body to develop European accounting standards did receive some
limited discussions before 1990s but by the middle of 1995 it was clear to the EC that the
member state would not support it (Camfferman and Zeff, 2007, p.420-424). The two
alternatives available for the EC were US GAAP and IAS. US GAAP was not supported,
not only was it too verbose and detailed, but it was also an American import, developed by
the FASB which would have little or no interest in the views of Europeans when
developing future standards as excerpted below (EC, 2000).
8 EU Financial Reporting Strategy: The Way Forward 2000, para 14).
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IAS also has the distinct advantage of being drawn up with an international
perspective, rather than being tailored to the US environment. US GAAP, on the other
hand, is voluminous and is based on very detailed rules and interpretations.
Considerable education and training is necessary in order to use its standards. In the
US its effective application stems largely from the strong regulatory and enforcement
powers exercised by the US Securities and Exchange Commission. The European
Union does not, of course, have influence on the elaboration of US GAAP.
(EuropeanCommission, 2000, EU Financial Reporting Strategy: The Way Forward,
para.15).
In 2000, the EC designated the as-yet-unborn IASB as its de facto standard-setter. In
2002, the European Parliament required all EU-listed companies to report under IFRS by
2005. After the adoption, the EC which was pursuing a single set of accounting standards
across its diverse capital market, wanted to play a significant role in the international
accounting standard-setting arena and avoid US dominance in this process (Camfferman
and Zeff, 2007 p.422-423). The EC stated that the central objective of its revised strategy
in adopting IFRS “is that the policy should ensure that securities can be traded on EU and
international financial markets on the basis of a single set of financial reporting
standards”9
The decision to adopt IFRS by the EU in 2002, proved to be a major drive for IFRS
diffusion to other parts of the world. Technically, the EU maintains an independent
process of having each individual IFRS evaluated by its advisory group, the European
Financial Reporting Advisory Group (EFRAG), which was established in 2001. Due to
modifications that can emerge in the process, the EU-version of IFRS is not identical to
IFRS issued by the IASB. Nevertheless, the ‘European effect’ pushed other countries to
consider a similar strategic move of adopting IFRS. In July 2003, Australia announced the
adoption of IFRS by 1st January 2005, which triggered shock and anger by Australian
stakeholders (Picker, 2007). In media releases from the Australian Financial Reporting
Council on 3rd July 2002, the chairman explicitly stated that Europe’s IFRS adoption was
a major motivation.
9 EU Financial Reporting Strategy: The Way Forward 2000, para 7.
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Mr. Lucy said he understood that the 1stJanuary 2005 timing is somewhat later
than the Government would have liked. However, it is determined by the decision
of the European Union to require EU listed companies to prepare their
consolidated accounts in accordance with IASB standards from that date, in
support of the EU single market objective. ‘Australia certainly cannot afford to lag
[behind] Europe in this regard’, Mr. Lucy said. (Australian FRC media release, 3rd
July 2012).
Besides Australia, Japan's decision to harmonise their standards with IFRS was also
highly influenced by the EU’s decision. The Committee of European Securities Regulators
(CESR) advice to Japan’s FSA in July 2005 was a major contributing factor in leading the
BAC (Business Advisory Council) and the Accounting Standards Board of Japan
(ASBJ)10 to sign the Tokyo Agreement with the IASB in 2007. When the EU adopted
IFRS in 2005, CESR made an assessment of Japanese GAAP and concluded that there
were 26 areas of differences between Japanese GAAP and IFRS. CESR considered
Japanese GAAP as not equivalent to IFRS and this elicited concern from Japanese
companies listed in European markets (Kaneko and Tarca, 2008). IFRS harmonisation
attempts in Japan emerged from the pressure to convince the EU that Japanese GAAP was
equivalent to IFRS since Japanese companies relied heavily on European capital markets
for external financing (Skinner, 2008).
Recent empirical evidence also corroborates historical evidence concerning how this
‘European effect’ has been an influential factor in IFRS diffusion throughout the world.
Research by Ramanna and Sletten (2009) tested for the presence of network effects in the
decision of over 90 non-EU countries to adopt IFRS between 2003 and 2008. Using 552
country-year observations, they found that the network benefits expected to accrue from
the economic relations with the EU were a dominant source of influence. This conclusion
was especially true for larger countries rather than countries with smaller GDPs.
Across Atlantic, US SEC also solicited views from its stakeholders for lifting the
reconciliation requirements for private issuers which used IAS. US SEC ‘Concept
10 BAC is Business Advisory Council – an advisory council of Japanese FSA. ASBJ is Accounting
Standards Board of Japan.
Chapter 2. The Rise of IFRS
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Release’ was issued in February 2000 and the basic issue raised was whether there exists a
supporting infrastructure to assure IASC standards would be rigorously interpreted and
applied11. The key question was ‘Are the IASC standards of sufficiently high quality to be
used without reconciliation to US GAAP in cross-border filings in the United States?’ and
SEC deputy chief of accountant reported the summary of the response of this question as
‘most of Europeans say ‘yes, definitely’ while most US respondents say ‘not yet’.”12
Europeans viewed this concept release as evidence the SEC would never be satisfied and
might imposing even more conditions (Camfferman and Zeff, 2007 p.347)
Apart from the Asian financial crisis and European adoption, another important
milestone in the global diffusion of IFRS was the decision of the US SEC in November
2007 to exempt foreign-listed companies from reconciling their financial statements to US
GAAP if they used IFRS (as issued by the IASB) as the basis of their financial reporting.
When the SEC issued a “Roadmap to Convergence” in 2005 in collaboration with the EU,
the elimination of the SEC’s 20-F reconciliation for foreign issuers using IFRS was aimed
to be effective by 2009 (Street, 2007). After the 2007 decision, the prospect of the world
achieving one global accounting standard increased. In August 2008, the SEC
unanimously, and with enthusiastic support from all of the participating staff offices and
divisions, approved a rule proposal containing a roadmap towards required adoption of
IFRS by US issuers. (Zeff, 2012). With this positive development, even the US pro-
competition scholars like Syam Sunder and Kothari, could not deny the possibility of one
global accounting standard becoming achievable.
“If the current trends continue, the US, the EU and many other parts of the world
may claim to have reached this long-sought goal of uniformity in the foreseeable
future.” (Sunder, 2010).
“The ongoing collaboration between the FASB and IASB could lead to a single
global standard-setter within the next decade.” (Kothari et al., 2010).
11 US SEC Concept Release was issued in 16 February 2000. The document is available at:
https://www.sec.gov/rules/concept/34-42430.htm (Accessed 4th September 2015) 12 John M.Morrisey remarks at 28th National Conference on Current SEC Developments (5December
2000). The speech is available at https://www.sec.gov/news/speech/spch443.htm (Accessed 4th September
2015)
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2.5 IFRS v US GAAP and the global financial crisis
There was international optimism that the US would adopt IFRS after the SEC
published its proposed roadmap in 2008, outlining key activities that needed to be
completed before a decision could be made to allow US filers to adopt IFRS. The SEC
aimed to evaluate progress in 2011 and at that time would decide whether to require
mandatory use of IFRS as issued by the IASB, beginning in 2014. The roadmap also
sought feedback on whether or not the SEC should enforce mandatory adoption based on
market capitalisation, with large accelerated filers required to file using IFRS in 2014,
accelerated filers in 2015 and non-accelerated filers in 2016.
However, the global financial crisis which started in Europe hit the US badly around
2007-2008. Political bodies were intrigued as to whether accounting standards were a
contributing factor in the failure of banks, financial markets and the overall economy
(Bengtsson, 2011). Fair value was seen as the culprit of the crisis and the EU successfully
put pressure on the IASB to change its accounting standards for financial instruments (see
Bengtsson 2011 for more details). Thus, the IASB's response to the EU’s political pressure
placed the issue of IASB independence under scrutiny, especially by the US stakeholders13
and the SEC14.
When Mary Schapiro was appointed as the new SEC chairman in February 2009, she
received a lot of pressure from the senate to regulate the market 15 . Accounting
standardisation ceased to be a main priority for the SEC, and their attitude towards IFRS
adoption started to change. The quality of IFRS and the independence of the standard-
setter became the major issues in Schapiro’s reluctance to continue the proposed 2008
roadmap as was expressed at her answers during US senate confirmation hearings:
13 For example the study of Council of Institutional Investors :
http://www.cii.org/files/publications/white_papers/06_06_11_criteria_for_an_independent_accounting_stan
dard_setter.pdf (Accessed 4th September 2015) 14 See SEC staff June 2011 report page. 68 :
https://www.sec.gov/spotlight/globalaccountingstandards/IFRS-work-plan-final-report.pdf (Accessed 4th
September 2015 15 Stepehen Labaton, S.E.C. Nominee Offers Plan for Tighter Regulation” The New York Times, 15 January
2009 http://www.nytimes.com/2009/01/16/business/economy/16sec.html?_r=0, (Accessed 4th September
2015)
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On other issues, she plans to back off on some of Cox’s plans, namely the proposed
roadmap for converting companies to international financial reporting standards.
She has concerns about the pace of the timeline, the independence of the overseas
standard-setter, and the quality of the rules themselves. Considered more
principles-based than U.S. GAAP, IFRS standards are not as detailed, and allow
more room for interpretation, she said. She is also worried about what the
conversation might cost companies, noting that the SEC estimates that the price
tag could run as high as $32 million for the largest firms adopting IFRS. “I will
not be bound by the existing roadmap that’s out for public comment,” she said.16
(CFO.com, 15th January 2009).
Schapiro dismissed the SEC’s 2008 roadmap (Camfferman and Zeff, 2015 p.507) and
directed SEC’s staff to come up with another work plan for incorporating IFRS into the
financial reporting system for US issuers. SEC staff then issued a work plan in February
2010. The SEC staff have published various reports ever since, including a May 2011 staff
paper which focused on exploring a possible method of IFRS incorporation and the
“IFRS Application paper” in November 2011 which analysed IFRS in practice. On 5th
December 2011, SEC chief accountant, Jim Kroeker announced a delay in a decision on
the IFRS work plan for US markets.
When SEC staff issued their final staff report on July 2012, many parties expected that
they would give a clear recommendation to the commissioners on when and how IFRS
would be incorporated into the US financial reporting system. The long expected final
report was an anti-climax for some as it failed to provide any recommendations to the
commissioners on how the US could proceed to adopt IFRS. Basically the staff report
considered the standards produced by the IASB to be of a high quality despite several
areas that needed further development. But the staff report questioned the independence of
the IASB due to its funding sources. The report also expressed concerns about the
timeliness of responses to widespread accounting issues by the IFRS Interpretations
16 Sarah Johnson, “Mary Schapiro Vows to Be Tough Enforcer”, 15th January 2009.
http://ww2.cfo.com/risk-compliance/2009/01/mary-schapiro-vows-to-be-tough-enforcer/ (Accessed 4th
September 2015)
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Committee, and lastly it argued that IFRS adoption would be costly for US public
companies17.
The US indecision on IFRS adoption made the future of one global accounting
standard very uncertain. Although the convergence project between the IASB and the
FASB was to be completed by 2012, many standard differences remained unsolved
between the two standard-setters18, for example, the standard for financial instruments.
The IASB chairman recently conceded:
“We did not just make progress; there was also disappointment. We did not
succeed in one central recommendation of the FCAG and G20, and that is in the
area of convergence in the IASB’s and the FASB’s Standard for financial
instruments […] With regard to Offsetting and most likely with Classification and
Measurement the FASB in the end reverted to existing practice in the United
States.”(Hans Hoogervorst’s Speech in Asia-Oceania IFRS Regional Policy Forum
in New Delhi, India, 8th March 201419).
In November 2012, the G20 revised its target for IFRS-US GAAP convergence for the
fourth time asking the IASB and the FASB to report no later than June 2013 on all
outstanding items with a specific timetable of completion (Reuters, 2012). However, at the
G20 meeting of February 2014 ended without a call for international standard-setters to
continue their ongoing efforts. The IASB also seemed to close the door on the future
opportunity of another convergence project with FASB. Thus, the only way for the world
to achieve a single global standard is for the US to adopt IFRS, as implied by IASB
chairman Hans Hoogervorst:
“This inability to deliver compatible outcomes with the FASB clearly demonstrates
the inherent instability of convergence as a mean to achieve a single set of global
accounting standards. For this reason, our Trustees wisely concluded that
convergence can never be a substitute for adoption of IFRS.” (Hans Hoogervorst’s
17 US SEC Final Staff Report is available at:
https://www.sec.gov/spotlight/globalaccountingstandards/IFRS-work-plan-final-report.pdf (Accessed 4th
September 2015) 18 Ibid, pp.13-14 19 Speech is available : http://www.IFRS.org/Alerts/Conference/Documents/2014/Speech-Hans-
Hoogervorst-March-2014.pdf, accessed on 12th March, 2014
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Speech in Asia-Oceania IFRS Regional Policy Forum in New Delhi, India, 8th
March 2014).
Some studies argue that US GAAP and IFRS should co-exist together (De Lange and
Howieson, 2006) and the idea of having a few international accounting standards instead
of one has been discussed by many scholars over the last ten years (Hail et al., 2010;
Kothari et al., 2010; Saito, 2008; Sunder, 2002; Sunder, 2011; Walker, 2010). US GAAP
and IFRS competition also received formal support by the American Accounting
Association (AAA). The Financial Accounting Standard Committee of AAA issued their
position to support competition among IFRS and US GAAP as there is no clear difference
in quality between the two standards (Jamal et al., 2008).
2.6 Conclusion
This chapter has provided a brief history of the rise of IFRS becoming a global
standard and the milestones for its diffusion (Figure 1 provides the timeline of IFRS
diffusion). IFRS has developed from a set of standards which countries were reluctant to
adopt to become a globally endorsed by many international organisations. However the
rise of IFRS as the global accounting standard faced challenges when US SEC receded
from its IFRS adoption roadmap plan. Such setback has also raised questions about the
validity and significance of IFRS claims as a high quality set of accounting standards.
Revisiting the IFRS adoption processes in some countries becomes relevant to investigate
if the diffusion of IFRS has been driven by the quality argument or shaped by other
feature such as political motives. The case studies discussed in this thesis would help to
cast light on what has not been discussed in the literature and may provide new
explanations for the diffusion of IFRS.
The diffusion of IFRS over the last decade has encouraged many research proofing the
claim of IFRS, however the research looking how IFRS was adopted and institutionalise at
the national field only can offers limited explanation to the mechanism of the diffusion. As
will be discussed in the next chapter, IFRS claims have been widely tested in the capital
market type of research (such as the claim of reducing the cost of capital).
Chapter 2. The Rise of IFRS
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* e.g Australia, Philippines, Hongkong, South Africa
** e.g Indonesia, Malaysia, Singapore, Rusia, Mexico
1973, IASC established
1987, first IOSCO-IASC
project
1993 IOSCO-IASC revision
project
1997-1998 Asian crisis
2000, IOSCO endorsement
2002 EU decided to adopt IFRS by
2005. Convergence project starts between IASB
and FASB
2005, IFRS adoption by EU,
and some countries*
2007 US SEC allowed IFRS for foreign issuers
2008 Global Financial crisis
2012,
Some countries adopt IFRS for
the first time**
IASB-FASB convergence
ended.
Figure 1. Timeline of the global diffusion of IFRS
Chapter 3. Literature Review
Page 47 of 307
Chapter 3. Literature Review
3.1 Introduction
As a global accounting standard, IFRS is often described as a high quality accounting
standard which generates huge economic benefits to the countries that have adopted it.
The scale of IFRS diffusion over the last 10 to 15 years has generated extensive research
on its impact (see Baker and Barbu, 2007; Tarca, 2012). However, while research has
provided evidence that firms switching to IFRS exhibit higher accounting quality than
those using local GAAP (see Brüggemann et al., 2013 for an overview), the result is not
very conclusive when compared with US GAAP (Leuz, 2003; Barth et al., 2012; Lin et al.,
2012). More recent research has also argued that the benefits of IFRS adoption are only
significant in countries with strong legal and reporting enforcement regimes (Landsman et
al., 2012; Christensen et al., 2013; Li, 2010), implying the role of IFRS in improving the
accounting quality may not be as significant as claimed by IFRS supporters. Thus
investigating how national actors in countries which have adopted (or converged to) IFRS
assess its quality relative to US GAAP is potentially pivotal to revealing if the issue of
quality is imperative in IFRS diffusion.
Arguably, the ‘high quality’ claim of IFRS is influential for countries who perceive
their local accounting standards as low-quality. Accounting standard setting can be an
expensive exercise and many countries may not have resources, or appetite, to develop
good quality local accounting standards. Adopting IFRS can be an efficient choice to
provide good quality accounting standards as the research and due process expenses would
be borne by IASB. However it is not clear how the ‘quality’ of IFRS has been considered
when countries have choices between IFRS and other good quality accounting standards.
The literature review chapter begins with the analysis of the existing research in
answering whether IFRS produces better quality accounting information. Using
quantitative research in the most part, this section tests the claim that IFRS is a high
Chapter 3. Literature Review
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quality accounting standard, especially when compared to US GAAP. The second section
discusses the available research pertaining to reasons for countries adopting IFRS. Some
case studies of developing countries which have adopted IFRS are also discussed in this
section. The chapter concludes by considering research on accounting standard setting,
highlighting the lack of research on the strategic decision-making processes among
national standard-setters when the decision to adopt IFRS was made.
3.2 Does IFRS produce better quality accounting information?
IFRS is often claimed to be a high quality standard. The term high quality has been
used extensively by the IASB in many speeches and even in their mission statement.
However to define what contributes to the quality of an accounting standard is not easy.
What makes IFRS a good quality set of standards remains unclear, e.g. is it because of its
due process, or because it is principles based, has fewer accounting choices, or because it
produces better quality accounting data or a combination of all of the above?
Alternatively, the purpose of a financial reporting standard is said to be to create relevant
and reliable financial report for the users, thus it could be argued that a quality accounting
standard is the one that can satisfy the demands of financial statement users (Ball, 2006).
Other scholars, Barth et al. (2008) reflected on the way the IASB improved IFRS to
become a high quality set of standards when compared with the earlier standards produced
by the IASC which involved making IFRS principles-based, removing allowable
accounting alternatives, and requiring accounting measurements that ‘better’ reflected a
firm’s economic position and performance. The IASB was also perceived to have created
a set of standards which provided earnings information, and balance sheets more relevant
to specific users, compared to the standard ones issued by its predecessor (Ball, 2006).
Chronologically, it has been claimed that the first time the term ‘high quality’ was
used in the international accounting standard-setting discussion was by the US SEC,
referring to it as an attribute that IASC standards must possess (Zeff, 2012). It was
mentioned by US SEC chief accountant, Michael Sutton, before the AAA anual meeting
in 1997. The SEC identified the essential elements of high quality accounting standards:
Chapter 3. Literature Review
Page 49 of 307
“The standards must be of ‘high quality’ -- they must result in comparability and
transparency, and they must provide for full disclosure. Investors must be able to
meaningfully analyze performance across time periods and among companies.”
(Michael Sutton, US SEC Chief of Accountants, AAA Annual meeting 1997).
As the roles of the US SEC and the FASB were undeniably significant in the
establishment of the IASB in 2001 (Camfferman and Zeff, 2007 p.469 and p.487; Street,
2007), the notion of high quality from a US perspective arguably influenced the IASB’s
definition. The FASB in 1999 produced a report entitled International Accounting
Standard Setting: A Vision for the Future which discussed the quality of accounting
standards in significant detail. The report emphasised the importance of a sound
conceptual framework as a prerequisite for high quality international accounting
standards. With an underlying assumption that the objective of an accounting standard is
to provide financial reporting for external investors and creditors, the FASB report
stipulated that to be a good quality accounting standard, it should (FASB, 1999):
be consistent with the guidance provided by an underlying conceptual framework;
avoid or minimise alternative accounting procedures, explicit or implicit, because
comparability and consistency enhance the usefulness of information;
be unambiguous and comprehensible so that the standard is understandable by
preparers and auditors who must apply the standard, by authorities who must
enforce the standard, and by the users who must deal with the information
produced by the standard;
be capable of rigorous interpretation and application so that similar events and
transactions are accounted for similarly across time periods and among companies.
The IASB set the development of ‘high quality’ accounting standards as their mission
and attracted accounting scholars to find evidence of this quality in the application of
IFRS standards, especially after Europe adopted IFRS in 2005 when capital market data
became available for analysis. The claims made by the IASB that IFRS reduced the cost of
capital and increased financial reporting comparability were widely tested, especially in
Europe. One of the most highly cited papers to verify this claim was Barth et al. (2008)
who found that IFRS improved accounting quality across 21 countries (less earnings
management, greater timely loss recognition and more value relevance of accounting
Chapter 3. Literature Review
Page 50 of 307
figures). However, as acknowledged by the authors, these positive findings did not
distinguish as to whether accounting quality improved because of IFRS or due to the
incentives under which corporate management was funded. And their study excluded
firms that had used US GAAP before switching to IFRS. Indeed, other research suggests
that firms using IFRS generally exhibit higher accounting quality than firms using local
GAAP (Barth et al., 2008; Horton et al., 2013).
Numerous capital market benefits of IFRS adoption have been identified, including a
reduced cost of capital and improved liquidity (Daske et al., 2008; Lee et al., 2008; Li,
2010). Other positive impacts of IFRS revealed by existing research included higher
foreign investment (Amiram, 2012; Covrig et al., 2007; Landsman et al., 2012; Yu, 2010),
and greater analyst following and reduced analyst forecast dispersion (Byard et al., 2011;
Horton et al., 2013; Tan et al., 2011). Collectively, these studies tend to suggest that firms
applying IFRS should have higher financial reporting quality and greater comparability
than those applying domestic accounting standards. It is important to note that in most of
this research what is meant by domestic accounting standards are non-US GAAP standard.
However various studies to verify the claim of IFRS quality using capital market
variables do not provide clear evidence of whether the positive results were due to IFRS
quality or due to other market incentives. Those who believe the latter, argue that
incentives are more influential in the improvement of financial reporting quality than
accounting standards. In countries where incentives are low for managers to produce good
quality financial reporting, the adoption of IFRS has been said to be futile (Ball et al.,
2003).
A study in a European setting by Lee et al. (2008) argued that mandatory adoption of
IFRS in Europe reduced the cost of capital, but not necessarily because it was a better
quality standard. The strength of financial reporting incentives and enforcement played an
important role for a significant reduction of cost of capital. The UK surprisingly enjoyed
the biggest reduction in the cost of capital compared to other European countries where
there was a wider gap between their accounting standards and IFRS (e.g Greece). This
finding was unexpected as logically, if the adoption of IFRS was really impactful,
countries with wider gaps between their local GAAP and IFRS should have benefited the
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most. Their study found limited and mixed evidence of such IFRS claimed benefit of cost
of capital reduction in European countries with weak institutional environment
characteristics.
In fact the study of German listed companies found that the adoption of IFRS did not
necessarily lead to higher quality accounting when preparers have no incentives to become
more transparent in their reporting (Christensen et al., 2013). The study found that
companies more resistant to of IFRS adoption (companies that adopted IFRS after it was
mandated instead of being voluntary adopters) have closer connections with banks and
inside shareholders, consistent with lower incentives for the claimed adoption of ‘more
comprehensive’ accounting standards. Similar evidence was also found in East Asian
jurisdictions (such as Hong Kong, Malaysia, Singapore and Thailand). Ball et al. (2003)
argued that in order to pursue better financial reporting quality, East Asian countries
needed to change manager and auditor incentives and other institutional factors (political,
legal and economic institutions) rather than just adopting an alleged high quality standard
in isolation.
Political and legal institutional structures of a country also shape the way accounting
numbers are reported. Research by Bushman and Piotroski (2006) revealed that firms in
countries with high quality judicial systems reflect bad news in reported earnings faster
than firms in countries with low quality judicial systems. Bushman and Piotroski (2006)
drew their conclusions from studying the financial statements of 38 countries over ten
years. Strong public enforcement aspects of securities law also forces the firms to be less
conservative by reporting good news more slowly. The importance of legal enforcement is
also echoed by Landsman et al. (2012) affirming that the effects of IFRS after mandatory
adoption in sixteen countries depended on the strength of legal enforcement.
The Landsman et al. (2012) study investigated more than 20,000 earnings
announcement samples in sixteen countries over the period 2002-2007. They found
evidence of three mechanisms through which IFRS adoption increases information
content: a reduced reporting lag, increased analyst following, and increased foreign
investment. However, the effect of mandatory IFRS adoption depended significantly on
the strength of legal enforcement in the adopting country. It is important to note that in
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this study, Landsman et al. (2012) compared IFRS with local GAAP, and not with US
GAAP.
Contrasting IFRS against US GAAP, research demonstrates that there is no significant
difference between these two standards in term of producing good accounting numbers.
A number of papers examined differences in accounting quality between US GAAP and
IFRS in environments where firms were free to choose between multiple sets of standards
such as in Germany. Bartov et al. (2005) found no significant difference in earnings
quality, measured by the price-earnings relationship, for their sample of German ‘new
market’ firms that were allowed to choose between IFRS and US GAAP. Leuz (2003) also
argued that market liquidity and information asymmetry were similar across IFRS and US
GAAP firms. Such evidence tend to suggest that investors do not perceive accounting
numbers reported under US GAAP or IFRS as being significantly different.
Other research has even argued that US GAAP is better than IFRS. Van der Meulen et
al. (2007) argued that German companies using US GAAP had more predictable earnings
than those using IFRS. Lin et al. (2012) asserted that a mandatory switch from US GAAP
to IFRS in Germany could reduce the accounting quality of the firm. Using a sample of
German high-tech firms, Lin et al. (2012) found that accounting numbers under IFRS
generally exhibited more earnings management, less timely loss recognition, and less
value relevance compared to those under US GAAP.
Similarly, Barth et al. (2012) also provided evidence that the application of US GAAP
resulted in higher value relevance of accounting information compared to foreign firms
using IFRS. Although comparability to US firms increased when foreign firms used IFRS
over their local GAAP, the accounting quality of IFRS firms was not better than that of
their US counterpart. Barth et al. (2012) compared US firms which used US GAAP with
non-US firms applying IFRS. The study found that US firms were better in all three
dimensions of accounting quality: earning smoothing, accrual quality and timeliness. The
earnings information quality of US GAAP-reconciled amounts also was of a higher
quality than earnings based on IFRS according to Gordon et al. (2008).
Based on the discussion in this first section, we can conclude that IFRS may bring
economic benefit to firms in adopting countries although research suggests IFRS does not
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work in isolation. Whether IFRS as an accounting standard produces better quality
accounting information remains inconclusive, especially when it is compared to the
quality of reporting generated by companies in compliance with US GAAP. Thus, it is
interesting to investigate whether the differences in quality between IFRS and US GAAP
become an important issue for national actors when they contemplate IFRS adoption.
Especially for countries which have had a close relationship with US GAAP prior to IFRS
adoption, and could, in theory, have chosen US GAAP instead of IFRS yet adopted IFRS
despite the limited evidence of its superior quality.
3.3 The reasons why countries adopt IFRS
The capital market benefits of IFRS adoption have been the major selling rhetoric for
the promoters of IFRS. Developed countries with small domestic capital markets such as
Australia and New Zealand considered that the future growth of their markets required
international investment which would be promoted by the adoption of IFRS (Picker, 2007;
Tarca, 2012). Similar reasons were also put forward by Canadians, based on their
perception that the small size of their capital market could not afford to retain ‘made in
Canada’ reporting standards, and should therefore adopt IFRS (CICA, 2012).
The presence and size of a capital market as reasons for a country adopting IFRS is
also prevalent in the developing world. For example the study by Zeghal and Mhedhbi
(2006) investigated the factors for developing countries to adopt IFRS. Their multivariate
analysis of 64 developing countries proposed the following factors as possible
explanations of IFRS adoption: economic growth, education level, degree of economic
transparency, cultural aspects and the existence of a capital market. Their study claimed
that developing countries with the highest literacy rate, having a capital market and
belonging to the Anglo-American culture were the most motivated to adopt IAS.
According to their study, capital-market variables had a strong effect, signalling that
developing countries decided to adopt IFRS for economic reasons, i.e. to improve
investment in their capital market.
However for developing countries, various case studies also demonstrate that there are
many other non-economic factors influencing the decision for a country to adopt IFRS.
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Pressure from international donor organisations such as the World Bank, the Asian
Development Bank, the IMF and the EU had been a major cause for developing countries
to adopt IFRS, such as in the case of Bangladesh, Pakistan, Egypt, Kazakhstan, Romania
and Zimbabwe (Albu et al., 2011; Chamisa, 2000; Hassan, 2008; Hussey and Ong, 2006;
Junaid and Ghani, 2005; Mir and Rahaman, 2005; Tyrrall et al., 2007)
According to Tyrrall et al. (2007), although Kazakhstan, a former Soviet republic
which only became an independent country in late 1991, could not make a strong case for
IFRS adoption, it had little choice but to proceed with IFRS as the financial aid received
by international donor bodies was conditional upon that country’s acceptance of IFRS-
based accounting standards. Based on their survey of various stakeholders in the country,
Tyrrall et al. (2007) concluded that there was less support for the claimed relevance and
importance of IFRS to the range of firms and investors in the country. Despite this, in
1992, Kazakhstan's government decided in favour of IFRS adoption rather than a
nationally specific accounting system (Tyrrall et al., 2007).
Romania, one of the ex-communist countries had to adopt IFRS when it became an EU
member in 2007. However, the decision to adopt IAS/IFRS was taken in 1997-1998 as
imposed by the World Bank as one of four conditions for granting it financial assistance
(Albu et al., 2011). The decision to adopt IFRS was reinforced in the subsequent reforms
in 1999 and 2001, despite the fact that the benefits of harmonisation with IFRS were not
perceived as significant by finance directors of listed companies in Romania (Ionas¸ cu et
al., 2007).
The adoption of IFRS is also associated with changes in a country’s political
philosophy, for example changes from a socialist towards a market based economy. This
is illustrated by the case of China which has been gradually converged with IFRS,
incorporating it into their local standards over a period of 15 years (Peng and van der Laan
Smith, 2010). The case of Egypt (illustrated in (Hassan) also concluded that the adoption
of IAS was due to the change from a socialist regime to a market economy with an ‘open
door’ policy.
This study will focus on the decision-making process of IFRS adoption includes three
emerging economies and three developed economies. Indonesia, Brazil and the Philippines
Chapter 3. Literature Review
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were emerging economies which adopted IFRS in 2012, 2010 and 2005 respectively.
Canada, Japan and the USA represent more developed countries and also have significant
influence in the IFRS policy-making and standard-setting arena due to their
representations in various committees of the IFRS Foundation. Canada adopted IFRS in
2011, while Japan has made IFRS available for its listed companies since 2010 and
recently in 2013 extended the IFRS option for non-listed companies. Although the USA
has not adopted IFRS for their domestic companies, nevertheless IFRS is used by almost
500 foreign companies listed in the US20 which is more than the total number of listed
companies in many IFRS adopting countries.
The selection criteria for sampled countries will be discussed in more detail in chapter
five, however the commonality between the six sampled countries is their close
attachment to US GAAP before they adopted IFRS. The accounting standards at the
sample countries were developed using US GAAP as their main references. Thus we
expect these countries to have had a more difficult decision-making process in choosing
IFRS, compared to ‘new’ countries such as Kazakhstan or countries with a strong
dependence on international donor bodies which may have been coerced to adopt IFRS
such as Egypt and Bangladesh.
3.4 The study of accounting standard setting: Identifying the research gap
Standardisation as being defined by (Botzem and Dobusch, 2012) as the activities of
the setting, diffusing, and implementing of rules, mostly discussed how a standard was
formed and diffused in to a global norm. However, the emergence ‘private standard-
setter’, beyond nation-states and meta-governmental organisations, in producing global
rules and standards are also receiving increasing attention (Büthe, 2010; Boli and Thomas,
1997; Brunsson and Jacobsson, 2000; Botzem and Dobusch, 2012; Humphrey and Loft,
2009; Fransen and Kolk, 2007). The current literature on standard making process
accentuates the issue of stakeholder participation (Hallström, 2004) (Perry and Nölke,
20 According to speech of Michel Prada, Chairman of trustee of IFRS Foundation, 11 March 2014 in
Riyadh. The speech can be accessed: http://www.IFRS.org/Alerts/Conference/Documents/2014/Speech-
Michel-Prada-Riyadh-March-2014.pdf, accessed 15 March 2014.
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2005; Durocher et al., 2007; Young, 2006) and the important role of negotiation in
standard making processes (Nölke and Perry, 2007; Botzem and Hofmann, 2010).
The IASB as a private standard-setter has attracted a lot of attention in the literature of
standardisation. The institutional transformation of IASB over the last 25 years has been
discussed (Camfferman and Zeff, 2007; Camfferman and Zeff, 2015; Richardson and
Eberlein, 2011; Botzem, 2012), as well as the political pressures it received (Nölke and
Perry, 2007; Bengtsson, 2011; Georgiou, 2010). For example the pressure from EU has
been claimed to increase after the 2008 financial crisis (Bengtsson, 2011). The political
pressure has been a challenge faced by the IASB on many occasions during the
development of standards in the past (Zeff, 2002).
Accounting standard in the literature of standardisation has been classified as non-
technical standards (Brunsson et al., 2012; Botzem and Dobusch, 2012). In contrast with
the technological standards such as Microsoft Windows for computer operating systems
which usually became dominant via market competition, IFRS became dominant due to
public endorsement (Botzem and Dobusch, 2012; Martinez-Diaz, 2005). As was discussed
in chapter two, the endorsement from the international bodies such as World Bank and
IOSCO has been pivotal for the diffusion of IFRS. The endorsement from national
standard-setters and capital market regulators also plays an important role in the diffusion
of IFRS by imposing it to the local firms. Standard’s diffusion and binding quality of a
standard are interrelated (Botzem and Dobusch, 2012) and arguably the decision of
countries to adopt IFRS has improved the legitimacy of IFRS which has been claimed as a
set of high quality global accounting standards. The study of the IFRS adoption process by
national actors such this thesis will improve our understanding of the global standard
diffusion and looking at the countries where they could have been endorsing US GAAP
instead of IFRS arguably will provide a richer explanation for the diffusion of IFRS.
The process of standard setting at the national level is also a very much political
process and not just a purely economic one (Ramanna and Sletten, 2009). The national
accounting standards are produced from a deliberation process, predominantly by
members of a standard board representing various parties with heterogeneous interests.
Accounting standards traditionally were a product of national actors, bounded to the local
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legal and culture (Radebaugh et al., 2006; Nobes, 1983), and some studies argued that
despite the effort of harmonization of reporting standards, the convergence of reporting
practices is unlikely to achieve due to different institutional and enforcement regimes
(Leuz, 2010; Nobes, 2013). Despite the claim that IFRS is a set of global accounting
standard, Nobes (2013) asserted that language issues as well as monitoring and
enforcement of the standard have become a factor in IFRS differences among its adopting
countries. For example ‘IFRS as adopted by the EU’ are not the same as IFRS issued by
the IASB and the emergence of Chinese and Venezuelan versions of IFRS would
probably not comply with the IASB’s IFRS (Nobes, 2013).
Understanding the mechanism of IFRS adoption by countries is critical to understand
the wide continuum on how IFRS is adopted in each jurisdiction. For example, a recent
survey by the IASB revealed that the endorsement process in each jurisdiction varied from
no endorsement procedures at all (more than 40 per cent of respondents from a total of 66
jurisdictions) to the multi-level endorsement, sometimes up to parliamentary level as in
the case of Australia, New Zealand and the European Union21. The level of scrutiny in the
endorsement process also varies from being a very rigorous process, standard by standard,
involving technically competent standard-setters to those which are automatically adopted
as they are issued by the IASB. While some endorsement processes are open to the public
with all discussions and meeting papers available on the publicly available websites of the
endorsers e.g. EFRAG (for the European Union), the ASBJ (for Japan) and the AASB (for
Australia), others are carried out by small groups of standard-setters working in closed
door meeting rooms, where even the notes of the meeting are not accessible to the public,
e.g. Indonesia and Philippines.
3.5 Conclusion
High quality has been an alleged defining characteristic of IFRS as a set of global
accounting standards, and it has been associated with the enhanced relevance and
reliability of accounting information generated through compliance with such standards.
21 IASB has been collecting survey from IFRS adopting countries as of 13 March 2014, there is 129
jurisdictions voluntarily submit the survey. The survey can be accessed at: http://www.IFRS.org/Use-
around-the-world/Pages/Jurisdiction-profiles.aspx
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Although some research provides evidence that IFRS produces better quality accounting
information compared to local GAAP, the evidence is less clear if it is tested against US
GAAP. Section one of this chapter presented pro-market-incentive research which has
argued that IFRS only corresponds to the reduction in the cost of capital in environments
with strong capital market incentives such as strong legal enforcement and investor
protection. Thus the question of whether IFRS is high quality, especially if they are better
quality that US GAAP remains inconclusive. If IFRS is not better than US GAAP, then it
is intriguing to understand why countries decided to accept IFRS, especially if they had a
close relationship with US GAAP before the switch.
Existing research on standard-setting processes exhibited is mostly focused at the
international level. Research exploring the standard setting process at the level of national
standard-setters is still relatively rare, especially in countries that arguably had a choice
between adopting IFRS or adopting/continuing with a set of standards of arguably
competing quality. Thus the mechanism of IFRS institutionalisation remains rather
unexplored. The process of how a decision to switch from US GAAP to IFRS emerged in
IFRS adopting countries has not been discussed in previous literature and will therefore be
the main contribution of this study.
The next chapter will discuss theoretical frameworks in the IFRS adoption process,
drawing on the recent development of institutional theory. This study utilises a
combination the institutional work theory (Lawrence and Suddaby, 2006) to frame the
mechanism of IFRS institutionalisation in the adopting country and world society theory
(Meyer, 2010) to propose a new paradigm of why countries adopt IFRS and how it has
been diffused and become a global accounting standard.
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Chapter 4. Framing the IFRS Adoption Process: The Value of an
Institutional Perspective
4.1 Introduction
Our modern world is marked by more rule-making activities at the transnational level.
For example with education, health or financial reporting, those spheres are increasingly
subject to international activities and initiatives (Djelic and Sahlin-Andersson, 2006).
Globalisation is not only about the flow of goods, people and capital, but a re-ordering of
the world where institutional rules are in major transition (Djelic and Sahlin-Andersson,
2006). A modern state is subject to standards, designed by various international bodies,
which set principles about the need to have democracy, a constitution, an educational
system and reporting standards for their companies. For some, the ‘global world’ is more
than a series of networks or systems of economic and political interaction; it has become a
single international society (Meyer 1987;Watson 1992, Boli and Thomas 1997)
The distinctive feature of globalization is a powerful trend towards marketisation in
many regions of the world (Djelic, 2006). Since the early 1980s, market ideology and
market-oriented policies have spread far and wide around the globe (Djelic, 2006).
Another distinctive feature of globalisation is the rise of international NGOs, meta-
organisations or even private organisations as global standard-setters (Boli and Thomas,
1997; Brunsson and Jacobsson, 2000). The rise of IFRS as a set of global accounting
standards has been driven by the spread or marketisation logic (Botzem and Quack, 2006),
and together with other key standards (such as ISA), IFRS has been used as a key
international financial framework standard. IFRS and other global standards in the
international financial infrastructure aim to maintain financial stability by standardising
the capital markets (Humphrey et al., 2009).
As globalisation accelerated in the 1980s, so did the internationalisation of the
accounting profession through the network of accounting service firms. Large accounting
firms in the US and UK which were traditionally bounded by national borders, quickly
became international firms. Through a series of mergers and the closure of Arthur
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Andersen, the Big Eight accounting firms in 1989 had evolved in to the Big Four by 2001
(Cypert and Association, 1991; Sullivan, 2002; Wootton and Wolk, 1992) and currently
dominate the accounting services around the globe. Accounting professional associations
which traditionally offered national examinations also became global associations by
exporting their examinations and extending their membership outside their home
countries. For example by 1995, two UK-based accounting professional bodies ACCA
and CIMA, had overseas memberships of 38.6 per cent and 22.6 per cent respectively
(Briston and Kedslie, 1997).
Research on international standardisation has mostly discussed the contested interplay
between actors and the institutional forces influencing the dynamics of international
regulation (see Humphrey et al., 2009; Djelic and Sahlin-Andersson, 2006; Hallström,
2004; Drori et al., 2006b; Brunsson and Jacobsson, 2000). The discussion about
globalisation and the world regulatory framework mostly presents the case of IASB as
the‘re-invented’ actor in a transnational regulatory space (Botzem and Quack, 2006; Jang,
2006; Hallström, 2004). Research has also delineated how the IASB evolved and how
IFRS has been diffused in the international arena (see Camfferman and Zeff, 2007;
Camfferman and Zeff, 2015; Arnold, 2012). However, case studies on the process of IFRS
adoption by individual countries often take a macro-realist perspective representing the
adopting country as the creature of worldwide systems of economic or political power,
exchange and competition.
Macro-realist arguments such as world-system theory (Wallerstein, 1974; Chase-
Dunn, 1998) view global capitalist expansion as a compulsion of profit-seeking forces
and portray the national actors as quite passive. Often the conclusions from the IFRS case
studies in developing countries demonstrate that IFRS adoption has been recommended by
an international donor. Authors of case studies of Greece (Artikis et al., 2010), Kazakhstan
(Tyrrall et al., 2007), Bangladesh (Mir and Rahaman, 2005) and Pakistan (Junaid and
Ghani, 2005) have argued that IFRS was not appropriate standard for such countries, yet
national actors seemingly feel that they do not have a choice but to adopt IFRS due to the
pressure of the role of transnational bodies such as the EU, IMF, ADB, and World Bank.
Chapter 4. Framing the IFRS Adoption Process: The Value of an Institutional Perspective
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This thesis aims to investigate the decision-making process of countries which have
adopted IFRS but utilising a different perspective than the macro-realists. In contrast to the
existing case studies on countries which have adopted IFRS, countries featured in this
study are not passive actors in the international arena, but are instead influential players,
and IFRS adoption in these countries emerged from institutional works of actors. The
sampled countries in this study are those who had a potential choice between IFRS and an
alternative (a previous national standard highly influenced by US GAAP). Using the world
society perspective, this study argues that the national actors are embedded in the world
culture of globalisation and the process of adoption at the national level did not take place
in a vacuum but was highly influenced by the international dynamics of the IFRS arena.
This chapter starts with a discussion on how institutional perspectives theorise about
globalisation compared to realist perspectives and their reflection on IFRS diffusion. The
world society theory will be discussed as the perspective to frame IFRS diffusion and the
importance of adopting countries as international players. Then it will discuss in more
detail the players according to world society theory which consists of actors and
‘rationalised others’ and review it in light of IFRS diffusion. The next section of the
chapter discusses the theoretical framework used for the empirical chapters. The analysis
of the country which will be the main empirical discussion of the later chapters will apply
the perspective of world society theory and institutional work.
4.2 IFRS diffusion and globalisation from a world society perspective
Macro-realists arguments such as world-system theory (Wallerstein, 1974; Chase-
Dunn, 1998) and state-competition theory (Tilly, 1992; Skocpol, 1979) see the nature of
the international relationship in globalization through notions of exploitation, domination,
competition, and manipulation (see Drori, 2008). The realist perspective on the nature of
social actors views nation states and international organisations as rational but often
passive constituents. These actors, from a realist perspective, are subunits of the global
capitalist structural system, wherein the nation state is the mere occupant of a role defined
by world economic and political/military competition (Meyer, 2010).
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IFRS as part of global order has been perceived by some as the new colonisation of the
advanced economy in less developed countries. Aras and Crowther (2008), have argued
that IFRS is the vehicle of colonial exploitation, and they continue to argue that its
promotion of IFRS is an attempt to foster an environment conducive to the appropriation
of the socio-economic resources of less powerful countries by IFRS standard-setting
countries. Aras and Crowther (2008) as well as other scholars (Nnadi, 2012; Bakre, 2008;
Arnold and Sikka, 2001) have argued that IFRS is diffused by powerful countries to their
own advantage to exploit less developed countries.
A similar perspective is shared to structure/frame the influence of British power in
African countries (Nnadi, 2012) and Jamaica (Bakre, 2008). IFRS in its present form is
more in line with western standards and practices to fit the requirements of international
mobility of capital rather than developing countries. As a neo-colonial tool, accounting has
been applied to accumulate and allocate economic surpluses and to safeguard the
‘colonial’ interests as well as other international capital. Strong western countries remain
important players in the international standard-setting arena and the nation state’s capacity
to regulate MNCs is compromised by history, domestic concerns and relationships with
class and capitalist interests (Arnold and Sikka, 2001).
This thesis offers a different perspective on IFRS diffusion processes. Although it does
not deny that pressure from international organisations exists, especially towards less
powerful countries, it is argued that IFRS is also diffused because global accounting
standards are increasingly becoming a part of world culture. Framed by world society
theory (Drori et al., 2006b), this study argues that IFRS diffusion is part of a world
cultural consolidation in an era of global social change.
World society theory offers an alternative image of global social change. Modern
globalisation involves an increasing sense that the world is itself a society with its own
social systems and culture. World society theory perceives globalisation as a dual process:
the global institutionalisation of world society and the diffusion of world societal models
to social units increasingly embedded in the global environment (Drori, 2003; Drori et al.,
2006a). It also involves enhancing internationality and transnationality by the diffusion of
Chapter 4. Framing the IFRS Adoption Process: The Value of an Institutional Perspective
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models worldwide while also consolidating the global (Drori, 2003). Globalisation is
therefore not only an adaptation and change of national institutions to global conditions
and pressures, but also about institutional building in the transnational arena (Drori, 2008).
Globalisation as a dual process is clearly distinct from a realist’s definition of
globalisation. Realists perceive that globalisation emerged from intense worldwide
transactions as well as inter-dependency. World society theory sees globalisation as more
than that but also includes an additional conceptual shift towards the universal, and is thus
a cultural process in addition to being an economic and political process (Drori, 2008). In
this way, the globalisation era is not only characterised by a remarkable intensification of
global exchanges or transnational relations, but also a change in organising logic from the
particularistic to the universal. The nationalistic view of nation states is fast fading, and
instead, nation states are now perceived to be part of a global world or world society. The
culture of world society serves as a ‘sacred canopy’ for the contemporary world (Berger,
1967).
Framed by world society theory, this study perceives nation states which have adopted
IFRS, as culturally constructed and embedded to world culture. In this study, countries
which have adopted IFRS are perceived as rationalised actors actively involved in shaping
IFRS. Using world society theory IFRS should not be perceived as a technological
exploitation tool used in the post-colonial era, but as a reification of one set of global
standards as world culture. The practice of making a unique national accounting standard,
which has been common until recently, has slowly been replaced by harmonising with
international standards.
Table 2 illustrates the difference between a realist’s perspective and an institutional
perspective as applied to the subject of IFRS diffusion.
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Table 2. Comparison of realist perspectives and world society perspectives
4.2.1 Understanding the key players involved in the diffusion of IFRS
In contemporary world society, the dominant global actors are not only nation states,
but also transnational corporations and international/inter-governmental organisations
(Boli and Thomas, 1997; Drori, 2008). International organisations are pivotal in shaping
world culture and forming a global structure of world polity. In particular, international
NGOs have proliferated from about 200 active organisations in 1900 to nearly 4000 in the
1980s (Boli and Thomas, 1997). In the globalisation of standards, the important role of
international organisations has been highlighted by many scholars, (Arnold,2012;
Humphrey at.al., 2009; Timmermans and Epstein, 2010; Meyer et.al., 2006) and has been
discussed in Chapter Two.
IFRS diffusion from a realist
perspective
IFRS diffusion from the world
society perspective
The perception of IFRS As technological tools which serve
the interest of colonialists, in less
powerful nation states.
IFRS serves as reification of
world culture: one set of global
accounting standard.
Nation states which have
adopted IFRS
Subunit of the global capitalist
structural system.
Perceived as rational, yet passive.
Rationalised actors.
Perceived as highly relevant
players.
The reasons why nation
states have adopted
IFRS
Capital dependency on an
international donor or coerced by
more powerful countries.
A rationalised option as nation
states want to be accepted in
world society.
The key players Emphasis on international
organisations and the international
regulatory system as the main
mechanism for diffusion.
International organisations are
important in developing world
culture but nation states are also
identity suppliers for world
culture. Players include
‘rationalised others’ who advise
national actors.
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World cultural principles license the nation state not only as a managing central
authority but also as an identity-supplying nation Meyer et al. (1997). Thus, in the IFRS
arena, it is argued that nation states contribute towards the identity of IFRS and are
intimately involved in the development of the individual standards. Contrary to common
belief that IFRS is made by a group of experts sitting in ivory towers writing standards to
be used by the whole world, there are some examples where new IFRS or amendments
were issued based on the requests of less powerful countries such as Malaysia which
recently successfully pushed for the revision of the agricultural standard. The realist would
see Malaysian lobbying efforts were designed to protect the Malaysian palm oil industry
from the volatility of the fair value of palm oil. However there is another argument that
Malaysia may have felt a responsibility to improve IFRS in an area in which it had
expertise. Malaysia provided evidence of a need to more accurately measure plants based
on real life experience and the enormous challenges to measure plants using fair value. A
better global standard in turn would benefit other agricultural producing countries, and as
a part of world society, these countries could definitely have had a genuine desire to
improve the quality of the standard by demonstrating its flaws and sharing the
implementation challenges faced in their jurisdictions.
World society is also made up of social elements such as sciences and professions
which have been labelled by Meyer (1994) as ‘rationalised others’ as he argued that the
term ‘actor’ hardly seems appropriate. These ‘others’ give advice to nation states and other
actors about their true accountable natures, purposes, technologies and so on in a
consortium of international associations. Scientists and professionals have become central
and prestigious participants in world society. Their authority derives not from their
strength as actors but from their authority to assimilate and develop the rationalised and
universalistic knowledge that makes ‘action’ and ‘actor-hood’ possible. In analysing the
actors as the national levels, this study would also investigate if such actors exist.
The accounting profession was heavily involved in the establishment of the
international standard-setter, the International Accounting Standards Committee (IASC).
When the IASC became IASB the funding support of the Big Four Firms become its
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major contributor, comprising around 25% of total contributions22. For IFRS diffusion, the
role of the accounting profession (as a whole) and the accounting firm is profound (Nolke,
2005; Perry and Nölke, 2005). As will be discussed further in empirical chapters, the
accounting profession has been a major supporter of IFRS in some countries and was
instrumental in advising previously reluctant national actors to adopt IFRS. In the US, for
example, the association of accountants, AICPA, allowed IFRS to be used by US private
companies and NGOs in 2008 23 despite the US SEC prohibiting IFRS for US-listed
companies.
4.3 Understanding the process of IFRS adoption from the perspective of adopting
countries
Whilst world society theory has been useful to understand how IFRS diffuses at world
level, the main contribution of this study would be the analysis of the adoption process
inside countries which have adopted IFRS, especially those who had a close relationship
with US GAAP prior to adoption. Using institutional perspectives, this thesis will
scrutinise how national actors made the decision and arguments they brought to silence
their opponents. IFRS carries a different logic to US GAAP, it is claimed to be more
principles-based while US GAAP is said to be more detailed and rules-based. Thus
replacing the old logic with a new one may bring a significant transformation to the
accounting practices. During the transition period following the adoption of a new
accounting standard, a country may endure significant institutional change. A study
looking at the institutional change of the national regulatory field, such as this thesis,
potentially would improve our understanding of the global diffusion of IFRS.
Country-specific case studies evaluating IFRS adoption generally, to date, have used
institutional isomorphism in their analysis to explain why countries homogenously adopt
the same accounting standard despite variances in the legal environment (code law vs
common law), business culture and the economic development (developing, emerging or
22 IFRS Foundation Annual Report 2007 p.15, available at http://www.IFRS.org/About-us/IFRS-
Foundation/Oversight/Annual-reports/Documents/IASCF_annual_report_2007.pdf (accessed 23 March
2014) 23 From AICPA website “IFRS FAQs”, available at http://www.IFRS.com/IFRS_faqs.html#q14,
(accessed 22 March 2014).
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advanced economies). However in the sphere on institutional theory studies, institutional
isomorphism has not been a dominant explanatory force for a good number of years with a
greater emphasis on actorhood in institutional theory (Boxenbaum and Jonsson, 2008),
supported by the development of institutional work and institutional entrepreneurship as
new theoretical frameworks to analyse institutional change.
This study examines the IFRS adoption process across multiple national regulatory
fields. DiMaggio and Powell (1983) defined a field as “organizations that, in the
aggregate, constitute an area of institutional life, key suppliers, resource and product
customers, regulatory agencies and other organization that produce similar services or
products.” (p.148) Central to this definition is the focus on a ‘set’ of organisations that
directly interact with one another in a meaningful way (Greenwood et al., 2002). National
regulatory fields consist of several organisations such as the accounting standard-setter,
the capital market regulator, the accounting profession, and the users of the standard. The
adoption of IFRS came to be seen as the result of the political process across these
organisations, but most importantly the adoption of IFRS, to some degree, transformed the
field by changing its institutional logic.
4.3.1 Criticisms of institutional isomorphism in the studies of IFRS
Institutional isomorphism was proposed by DiMaggio and Powell (1983) to explain
why organisations are so strikingly similar. DiMaggio and Powell (1983) highlighted
three mechanisms through which institutional isomorphic change occurs, each with its
own antecedents: (1) coercive isomorphism that stems from political influence and
problems of legitimacy, (2) mimetic isomorphism resulting from standard responses to
uncertainty; and (3) normative isomorphism, associated with ‘professionalisation’. As
more and more countries with different legal and cultural environments adopted IFRS over
the last 10 years, institutional isomorphism has been a common theoretical framework to
explain why countries became more homogenous in their accounting standards.
The use of institutional isomorphism as the framework to explain IFRS adoption more
broadly was suggested by Rodrigues and Craig (2007) and has been utilised in qualitative
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case studies for countries as well as companies adopting IFRS (Collin et al., 2009; Hassan,
2008; Mostafa Kamal, 2008; Mir and Rahaman, 2005; Albu et al., 2013; Albu et al.,
2011). In these particular case studies all authors argued that coercive force has been the
major factor in the IFRS convergence process -- either in the form of coercive pressure
from the international donor organisation such as the IMF to a country or a coercive
pressure by the national government’s on companies.
Although institutional isomorphism has been widely used by researchers to explain the
global diffusion of IFRS; careful attention should be applied before linking isomorphism
with diffusion as there has been much criticism in relation to this. Although there is
natural empirical affinity between isomorphism and diffusion, however, this can be
theoretically treacherous (Boxenbaum and Jonsson, 2008). Whilst institutional
isomorphism presupposes that legitimacy is the driving force behind diffusion, it may also
occur without any legitimately seeking behaviour and not everything that diffuses
enhances organisational legitimacy (Boxenbaum and Jonsson, 2008). In many cases
diffusion is a prerequisite for isomorphism, but diffusion need not always lead to
isomorphism; conversely all that looks similar need not be the result of diffusion
(Boxenbaum and Jonsson, 2008). Boxenbaum and Jonsson (2008) further illustrated that a
company may replace an existing structure with another one if they receive a substantial
state subsidy to do so. They are neither forced, uncertain, or under any moral obligation to
adopt the new structure, but simply see an opportunity to control costs. Similarly in the
IFRS adoption by the European Union (EU), the main reason for the adoption was not to
seek legitimacy but to find a similar platform for financial reporting across European
capital markets (EC, 2000 para.4). The adoption of IFRS by the EU is an example of the
natural demand and difficult to be explained by institutional isomorphism as the EU is
amongst the first full adopter(s). Before IFRS adoption, there was no existing single set of
accounting standards within the EU: rather there were a variety of national standards of
varying degrees of completeness, sophistication and authority, reflecting different national
traditions and institutional arrangements (Whittington, 2005).
As for the case of IFRS diffusion, a closer look at countries which have adopted IFRS
has revealed that different ‘flavours’ exist as countries amended the standards in the
process of adoption (Nobes,2013). Isomorphism assumes that the adopting countries are
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passive in absorbing the standard and IFRS is static, whereas what could, alternatively, be
viewed as evolving set of standards capable of being modified due to the difficulties faced
by the countries in the process of adoption.
Nevertheless, institutional isomorphism contributes an important role in organisational
theory as an alternative explanation for organisational change. Isomorphism concepts have
helped us to understand why organisations move closer to one another (Scott, 2008;
Boxenbaum and Jonsson, 2008), or in IFRS studies why many countries adopt the
standard despite different legal and cultural backgrounds. The isomorphism explanation
may have prevented researchers from looking closer to the core of the matter and
investigating how varying, competing institutions and multiple institutional elements often
interact in the key decision-making process which leads to IFRS adoption. By examining
the countries which had options between IFRS and US GAAP, this study expects to reveal
more contested interplay between interested actors.
Institutional isomorphism often neglects the importance of actors in the process of
IFRS decision-making. The empirics collected by these ‘isomorphic IFRS’ case studies
often focus on finding evidence of coercive pressure from international donor bodies on
the adopting countries. Thus, the contracts from the World Bank, IMF, IDB or the ROSC
have become the major documents analysed in these case studies (Chamisa,2000;
Uassan,2008; Hussey and Ong, 2006; Junaid and Ghani,2005; Mir and Rahaman, 2005).
That evidence may partly explain the reason for inexorable IFRS adoption, but the process
as to how decisions were made and the arguments for or against IFRS adoption amongst
institutional actors of the country remain relatively unexplored.
4.3.2 Looking closer at the process: Institutional work theory
The initial concern of neo-institutionalism was to explain organisational isomorphism
that could not be explained by competitive pressures or efficiency motives (DiMaggio and
Powell, 1983; Boxenbaum and Jonsson, 2008). From this perspective, agency was a
secondary consideration, understood as either a reaction to institutional pressures, or not
seriously considered at all (Lawrence et al., 2009). Institutional theory traditionally
perceives actors as being embedded in an institutionalised world view--making it difficult
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to explain how some actors are able to resist institutional pressures and initiate change
(Battilana, 2006). One explanatory stream attributes such change to institutional
entrepreneurs (DiMaggio, 1988) or actors who, because of their structural position within
a field or because of their unique social skill or power, are able to resist pressures of
institutionalisation or mobilise resources to initiate change (Greenwood and Suddaby,
2006; Battilana et al., 2009).
Institutional entrepreneurship has been used to frame the establishment of new
organisational forms in the accounting profession. Greenwood and Suddaby (2006), for
example, presented a Canadian case study on how the matured accounting service industry
changed from traditional audit service to multi-disciplinary practices. The role of
institutional entrepreneurs in the adopting country and their action in the diffusion of IFRS
has been neglected in existing IFRS literature as many case studies focused on exogenous
factors for IFRS adoption (Chamisa,2000; Hassan,2008; Hussey and Ong, 2006; Junaid
and Ghani,2005; Mir and Rahaman, 2005).
The notion of institutional entrepreneurs, however, has drawn substantial criticism.
Theorists object to the simplistic use of agency as an explanatory variable, in large part
because explanations are inconsistent with the logic of institutional theory. A central
assumption of organisational institutionalism is that actors are so embedded in their
institutional environments that existing arrangements are taken for granted and actors
cannot cognitively conceive any alternate arrangements (Suddaby and Viale, 2011).
Institutional work represents a new idea connecting, bridging and extending the work
of institutional entrepreneurship, institutional change and innovation and
deinstitutionalisations (Lawrence et al., 2009). Institutional works have been described by
Lawrence and Suddaby (2006) as “the purposive action of individuals and organisations
aimed at creating, maintaining and disrupting institutions”. It has been argued that the
creation of new institutions requires institutional work on the part of a wide range of
actors, both those with the resources and skills to act as entrepreneurs and those whose
role is supportive or facilitative of the entrepreneur's endeavours (Lawrence and
Suddaby,2006). Institutional work highlights three main aspects: it depicts institutional
actors as reflexive, goal-oriented and capable; it focuses on actors’ actions as the centre of
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institutional dynamics; and it strives to capture, agency and their interrelations (Battilana
et al., 2009).
The study of institutional work shifts the focus of traditional institutional theory from
how institutions govern action to how action affects and reshape institutions. In many
IFRS case studies (e.g Tyrall et al.,2007; Albu et.al.,2011), often the decisions of adopting
IFRS are perceived as something that is being decided by institutions (government,
standard-setters, the accounting profession). Those case studies often neglects to look
closer to the action made by individual actors to help the decision to materialise. The
current literature also rarely investigates if the action of adopting IFRS was made through
institutional works, for example, by creating a new institution or disrupting the status quo
at an existing institution.
Lawrence et al. (2009) argued that the critical issue for the study of institutional work
is the distinction between ‘creating, maintaining and disrupting institutions’ and the
‘creation, maintenance and disruption of institutions.’ The former describes a set of
activities in progress where the latter describes a set accomplishment. Although both could
be the focus of institutional work studies, Lawrence and Suddaby (2006) argued that the
former set is at the core of the study of institutional work. Thus, in this study we are
interested in the actors’ activities towards creating, maintaining and disrupting institutions
involved in the IFRS decision-making process.
The next three sections will discuss in more detail the three broad categories of
institutional work. The three broad categories: creating, maintaining and disrupting
institutions aim to connect disparate studies of institutional work such as the literature of
institutional entrepreneurship and deinstitutionalisation (Lawrence and Suddaby, 2006)
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4.3.3 Creating institutional work
‘Creating institutions’ has received the most attentions by scholars in the
organisational research area. As suggested by Table 3 below, Lawrence and Suddaby
(2006) summarised the forms of institutional work used in creating institutions.
Groups of
Institutional
Work
Forms of
Institutional
work
Definition Key references
for empirical
examples
Political work in
reconstruction of
rules, property
rights and
boundaries
Advocacy The mobilization of political and
regulatory support through direct
and deliberate techniques of social
suasion.
Elsbach and
Sutton (1992)
Galvin (2002)
Defining The construction of rule systems
that confer status or identify, define
boundaries of membership or create
status hierarchies within a field.
Fox-Wolfgramm
et al. (1998)
Vesting The creation of rule structures that
confer property rights.
Russo (2001)
Reconfiguration
of belief systems
Constructing
Identities
Defining the relationship between
sets of practices and the moral and
cultural foundations for those
practices.
Lounsbury (2001)
Oakes et al.
(1998)
Changing
normative
associations
Re-making the connections between
sets of practices and the moral and
cultural foundations for those
practices.
Townley (1997)
Zilber (2002)
Constructing
normative
networks
Constructing of interorganisational
connections through which practices
become normatively sanctioned and
which form the relevant peer group
with respect to compliance,
monitoring and evaluation.
Lawrence et al.
(2002)
Orssatto et al.
(2002)
Altering abstract
categorisations in
which the
boundaries of
meaning systems
are altered
Mimicry Associating new practices with
existing sets of taken-for-granted
practices, technologies and rules in
order to ease adoption.
Hargadon and
Douglas (2001)
Jones (2001)
Theorizing The development and specification
of abstract categories and the
elaboration of chains of cause and
effect.
Kitchener (2002)
Orssatto et al.
(2002)
Educating The educating of actors in skills and
knowledge necessary to support the
new institution.
Lounsbury (2001)
Woywode (2002)
Table 3. Creating institutions
Source: Lawrence and Suddaby (2006)
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Lawrence and Suddaby further grouped these types of institutional work in to three
groups. The first group consists of three types of institutional work, ‘advocacy’, ‘defining’
and ‘vesting’ are functions that reflect overtly the political work in which actors
reconstruct rules, property rights and boundaries that define access to material resources.
Advocacy by international organisations, arguably, has been a major form institutional
work in supporting the IFRS diffusion. As will be discussed further in the empirical
chapters, pro-IFRS actors also advocate other actors in the national arena to choose IFRS
over the alternatives.
The second group of practices on creating institutions emphasise actions in which
actor’s belief systems are reconfigured (Lawrence and Suddaby, 2006). The three
examples are: ‘constructing identities’, ‘changing normative associations’ and
‘constructing normative networks’. IFRS as a new accounting standard can be seen has
different logics and terminologies compared to old standards. Institutionalising IFRS to
the country with a prior belief system rooted in US GAAP accordingly may require actors
to reconfigure the logics of national regulatory arena from rules-based to principles-based.
In constructing identities or changing normative associations, professionals have been
argued as an important actor in changing the organisational field (Suddaby and Viale,
2011; Greenwood et al., 2002). In the IFRS adoption process, accounting firms and
formal associations of accounting professionals may also have a pivotal role in the
reconfiguration of national regulatory fields. Lastly, the third set of form, ‘mimicry’,
‘theorizing’ and ‘educating’ involve actions designed to alter abstract categorizations in
which the boundaries of meaning systems are altered (Lawrence and Suddaby, 2006).
4.3.4 Maintaining institutional work
The aim of institutional work in maintaining institutions involves supporting,
repairing or recreating the social mechanisms that ensure compliance (Lawrence and
Suddaby, 2006).
Table 4 below provides the list of examples of how the institutions are maintained
through various forms of institutional work.
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Groups of
Institutional
Work
Forms of
institutional
work
Definition Key reference for
empirical
examples
Ensuring
adherence to
rule systems
Enabling work The creation of rules that facilitate,
supplement and support institutions,
such as the creation of authorising
agents or diverting resources.
Leblebici et al.
(1991)
Policing Ensuring compliance through
enforcement, auditing and monitoring.
Fox-Wolfgramm et
al. (1998) Schuler
(1996)
Deterring Establishing coercive barriers to
institutional change.
Holm (1995)
Townley (2002)
Reproducing
existing
norms and
belief systems
Valourizing
and
demonising
Providing for public consumption
positive and negative examples that
illustrates the normative foundations of
an institution.
Angus (1993)
Mythologizing Preserving the normative
underpinnings of an institution by
creating and sustaining myths regarding
its history.
Angus (1993)
Embedding
and routinizing
Actively infusing the normative
foundations of an institution into the
participants’ day to day routines and
organisational practices.
Townley (1997)
Zilber (2002)
Table 4. Maintaining institutions
Source: Lawrence and Suddaby (2006)
The first three forms of institutional work, ‘enabling’, ‘policing’ and ‘deterring’
address the maintenance of institutions through ensuring adherence to rules systems
(Lawrence and Suddaby, 2006). This is important in term of IFRS adopting process as
research has shown that legal enforcement is pivotal to gain the benefit of IFRS adoption
(Landsman et al., 2012). The second group of maintaining institutional work,
‘valourizing/demonising’, ‘mythologizing’ and ‘embedding and routinizing’, focus on
reproducing existing norms and belief system (Lawrence and Suddaby, 2006).
Maintaining institutions by routinizing the reproduction of shared frameworks by
members can also be pursued through recruitment practices (see Zilber, 2002 for an
example). In the IFRS arena for example, IASB new members sometime come from
‘IFRS champions’ of the adopting countries, a key person who have been assisting the
countries in adopting IFRS. At the national level, this study will also observe if the sample
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countries experience changes of key individuals during the IFRS adoption process. The
placement of pro-IFRS individuals in the strategic position such as the chairman of
national accounting standard-setter may be pivotal to ensure the IFRS adoption decision
can be executed.
4.3.5 Disrupting institutional work
In the study of institutional change, the emphasis is primarily on the creation and
emergence of new institutions, rather than the work that is done to disrupt existing one
(Lawrence and Suddaby, 2006). However Oliver (1992) and Lawrence and Suddaby
(2006) argued that deinstitutionalization is a distinct process involving different
institutional work from that associated with the creation of new institutions.
Disrupting institutions represents institutional work aimed at attacking or undermining
existing mechanisms (Lawrence and Suddaby, 2006). Bringing in IFRS in to the countries
may require some disrupting work to disconnect the actors with the existing accounting
standard and mechanism of old standard setting. Table 5 below provides some examples
of institutional work in disrupting institutions.
Forms of
Institutional Work
Definition Key Reference for
empirical examples
Disconnecting
sanctions
Working through state apparatus to
disconnect rewards and sanctions from
some set of practices, technologies or
rules.
Jones (2001)
Leblebici et al. (1991)
Disassociating
moral foundations
Disassociating the practice, rule or
technology from its moral foundation as
appropriate within a specific cultural
context.
Ahmadjian and
Robinson (2001)
Undermining
assumptions and
beliefs
Decreasing the perceived risks of
innovation and differentiation by
undermining core assumptions and
belief.
Leblebici et al. (1991)
Wicks (2001)
Table 5. Disrupting institutions
Source: Lawrence and Suddaby (2006)
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In terms of the IFRS adoption process, it can be argued that the activities of actors in
disrupting the existing belief system could be pivotal in ensuring the new set of
accounting standards are accepted. Prior to the IFRS adoption, the adopting countries had
their own belief system in developing their own standards, for example the adopting
countries may have prioritised the need of local stakeholders in creating the standards and
looked upon US GAAP specifically for key reference points. This tradition can be
expected to have changed after the IFRS adoption, as national standard-setters
relinquished their authority to the IASB in creating the accounting standards for their
jurisdictions.
4.4 Conclusion
This thesis emphasises the interplay of actors and their institutional work in the IFRS
adoption process. Departing from institutional isomorphism, which is sometimes taken for
granted as the reason behind the decision to adopt IFRS, this study offers a closer
examination of the overall adoption process and the institutional work that contributes
towards the process of change. This is an important shift of study in IFRS adoption as
previous case studies often perceive the adoption process as a snapshot in the historical
time-line of the country’s accounting standards development, whilst this study sees the
adoption process as a movie with many actors playing out their roles. New actors may
have emerged during the movie - which may alter the complexity of the movie’s story
(e.g. the amendment with regard to IFRS adoption by Japan and the US).
This chapter has outlined the theoretical framework that will be used to understand the
diffusion of IFRS in the elected countries, and noted the key institutional perspectives to
be considered on. In contrast to a realist perspective, this study offers a different
ontological perspective by looking at IFRS as a world culture and that its diffusion is a
result of countries becoming part of world society. By using the theory of institutional
work, this study will focus on the work of actors in institutionalising IFRS at the national
regulatory field and perceive national actors as rational and active players in the process.
Chapter five will discuss the research methodology of the study. The emphasis of
chapter five will be on the selection methodology for the six countries chosen as samples
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in this study. Indonesia, Brazil, Philippines, Japan, Canada and the US were intentionally
selected based on their past relationship with the US GAAP. The adoption processes in
these selected countries were expected to provide debate on the relative quality of IFRS
and how the debate influenced the decision making. Chapter Five will also discuss the
detailed research methods applied in the study such as the respondent selection process
and the data analysis.
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Chapter 5. Studying IFRS Adoption Processes: A Research Methodology
“Understanding in any area of human inquiry has to be constructed
through a process of debate, be it explicit or otherwise, between
different conceptual systems, reasonings and analytical and
methodological approaches.” (Hopwood, 1978, p.1).
5.1 Introduction
Anthony Hopwood argued more than 30 years ago that accounting research should pay
more attention to the organisational and social context in which accounting operates
(Hopwood, 1978). More recently, he alerted scholars that accounting research is still too
conscious and conservative, too rigid and traditional, and insufficiently attuned to embrace
novel insights and bodies of knowledge (Hopwood, 2007, p.6). As was discussed in the
previous chapters, studies on IFRS have proliferated over the last 15 years, however our
understanding of the process of IFRS adoption across countries remains rudimentary, as
highlighted by Hopwood below:
“We know very little about the processes and consequences of standardisation and
the accountings for new phenomena… Our international understandings are still
poorly developed, to put it positively.” (Hopwood, 2007 p.6).
This study aims to improve our international understanding of IFRS diffusion by
investigating how IFRS was adopted (or not adopted) by a selected number of countries,
and this chapter addresses the research methodology employed in this study to carry out
the investigation. It starts with the research paradigm, discussing the ontological
perspective and the epistemological approach of the research. The chapter then discusses
how the country case studies were selected. The chapter concludes with an explanation of
the writing-up strategy and a discussion about the reliability and validity of the research.
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5.2 Research paradigm
The positivists often see IFRS as having specific characteristics, such as it being
principles-based, international in scope, and possessing high quality standards. In the area
of international financial reporting, the positivist approach has been widely applied to
study the economic impact of the adoption of IFRS (Daske et al., 2008; Barth et al., 2008;
Christensen et al., 2007). In confirming the quality of IFRS, quantitative research usually
tests the standard against the reduction in the cost of capital or the increase in analyst
forecasts. In these quantitative studies, the capital market mechanism is assumed to be
efficient and the market return acts as one of the key criteria to evaluate IFRS quality.
However, the process of IFRS adoption involves a complex transition involving
international and national actors (Tyrrall et al., 2007; Hassan, 2008). Thus, to understand
the process of how IFRS is adopted, a positivist approach would not be suitable. Arguably,
to enable better understanding of the processes and mechanisms, a qualitative research
approach is required (Maxwell, 2005; Creswell, 1994). Applying the constructionist view
(Crotty, 2003), the characteristics of IFRS are not inherent in the object but are socially
constructed by institutional and cultural contexts and such contexts in related process of
change have to be studies qualitatively.
Ordelheide (2004) proposed that “accounting, like other societal institutions, only
exists because we think it or conceive it”. The research design in this thesis assumes that
accounting standards are a reflection of the society in which they are situated and that this,
in turn, influences the development of institutions. International accounting standards such
as IFRS, as a societal institution, is linked to a number of other societal institutions in a
multitude of ways - the IASB as the rule maker, other standard-setters as adopters, the
regulators as enforcers, the companies as rule takers. They are all interconnected and play
a part in creating each IFRS.
Specifically, in contrast to the positivist approach, this research employs an
interpretative approach utilising qualitative methodology as an appropriate paradigm to
study the process of IFRS adoption. The constructivism paradigm allows the researcher to
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look for complexity of views rather than a narrowing of meanings into a few categories
and ideas. Meanings can be varied and multiple; for example, this research has
documented various explanations from the respondents as to what constitutes a high
quality accounting standard.
The study’s approach views the world as being socially constructed where in
individuals develop subjective meanings from their experiences – meanings directed
towards certain objects and things (Creswell, 2009). Using this paradigm, the researcher
is no longer objective and neutral but rather allowed to assign meaning to actions and
interpret the evidence based on past experience and cultural background. The process of
interpretation puts the researcher at the centre of the research and allows her to impute a
subjective perspective to the research. For example, relevant to this research is the past
experience of the researcher living in Indonesia and having been involved in the IFRS
convergence process.
The epistemological question concerns the relationship of the researcher with those
being researched (Creswell, 1994). In qualitative research, researchers interact with those
they study and try to minimise the distance between themselves and those being
researched (Creswell, 1994). Qualitative research is interpretative in nature and thus the
researchers play an important role as they play a vital role in interpreting the data. Biases,
values and judgements of the researcher should be stated explicitly in the research report
and such openness is considered to be useful and positive (Locke, Spirduso, & Silverman,
1987 as cited in Creswell, 1994).
The researcher worked as the technical director of the Indonesian Financial
Accounting Standards Board (DSAK) from 2009-2011 and her prior knowledge and
experience has inevitably influenced how she interpreted the data collected through the
fieldwork which has been used in this study. Traditionally, what researchers bring to the
research from their past experience has been treated as ‘bias’, something whose influence
needs to be eliminated from the design, rather than serving as a valuable component of it
(Maxwell, 2005). However, separating the research from other aspects of the researcher’s
life and experience can bring major disadvantages as it will cut off the researcher from a
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major source of insights, hypotheses and validity checks. Ignoring what researchers know
from their past experience about the settings or issues they propose to study can seriously
damage the research’s credibility (Maxwell, 2005).
Instead of treating past experience and knowledge as ‘bias’ that should be ignored, the
researcher has tried to incorporate her experience in a productive way. The researcher was
intimately involved in the process of IFRS convergence in Indonesia and her position as
the technical advisor of the board during this study period provided the access to
numerous respondents in this study. Her continuing involvement as part of the Indonesian
delegates in international standard-setter’s conferences also helped to create trust between
herself and the respondents.
However, this does not give the researcher license to uncritically impose her
assumptions and values on the research. As also argued by Reason 1988 as cited
inMaxwell (2005), the researcher should not be allowed to be swept away and
overwhelmed by her values and knowledge; rather, she should be conscious of such values
and knowledge and use this awareness as part of the inquiry process. During the interview
process for this study, the researcher disclosed her identity as a PhD scholar as well as her
role as the technical advisor for DSAK. However, she did not voluntarily explain her own
experience about Indonesia’s IFRS convergence unless the respondents inquired about it,
which a few did at the end of the interviews.
5.3 The case studies: Country selection criteria
This study aims to examine the experience of the IFRS adoption process in the
countries where the choice was evident between two sets of standards with comparable
claims to quality – i.e. IFRS vs US GAAP. It does not investigate how companies make
decisions when they are faced with more than one option; rather, it investigates how
national actors make such decisions in deciding on the national adoption of a particular set
of standard.
As argued by Yin (2009) , the case study method is pertinent for answering
explanatory questions such as ‘how or why did something happen?’ Since the aim of this
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research is to answer questions about the process of IFRS adoption, a case study research
design has been chosen as the main research methodology. A case study is defined by
(Yin, 2009) as “an empirical inquiry about a contemporary phenomenon (e.g., a ‘case’),
set within its real world context - especially when the boundaries between phenomenon
and context are not clearly evident.” (p.18)
Considering more than 122 jurisdictions have adopted IFRS (Pacter, 2014), the
selection criteria for case studies was critical. Candidates for case studies were chosen
from countries where, in the past, they had to make decisions about whether to choose US
GAAP or IFRS. A strong past connection with US GAAP was an important criteria for the
researcher in the selection of sample countries in expectation of revealing more debate on
the quality of standard.
At the moment, US GAAP is still allowed as one of the options in some capital
markets such as Switzerland, Japan and Canada. Although in the past US GAAP and IFRS
were competing in some European capital markets, for example in Germany before the
IFRS adoption period, EU countries are excluded in this study as the decision to adopt
IFRS was in order to comply with EU directives and not because IFRS is a better set of
standards than US GAAP (Albu et al., 2011; Tyrrall et al., 2007).
Japan and Canada are included in this study and Switzerland was also considered for
inclusion in the study. However, upon preliminary document analysis, it was noted that
Switzerland had never made a public commitment to adopt IFRS. Switzerland is the only
country among 66 countries which submitted the jurisdiction survey to the IASB and
admitted it had never made a public announcement to commit to IFRS (IASB, 2012).
Moreover, Switzerland may maintain its neutrality over any international standard in the
foreseeable future24. In fact, Swiss GAAP is gaining more support as a popular choice as
24 listed Swiss companies switched to Swiss GAAP after using IFRS for a few years
(Fiechter et al., 2012).
The final six countries selected for the study therefore are Canada, Brazil, Japan,
Indonesia, Philippines and the US. Canada and Brazil, who adopted IFRS in 2011 and
24 Implied by IASB chairman during IFRS Advisory Council Meeting, October 2013, in response to
Paul Pacter’s presentation “Jurisdiction’s profile of IFRS application”.
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2010 respectively, were chosen for their strong connection with the US economy as well
as US accounting standards. Representing developing countries, the Philippines, which
adopted IFRS fully in 2005, was chosen as it has a strong cultural and legal connection
with the US as a former US colony for more than 50 years between 1898 and 1946. In
these three countries, IFRS has been fully adopted word for word and is mandatory for
public companies.
Indonesia and Japan represent two countries which are still converging their local
standards with IFRS. The decision to close the gap between IFRS and local GAAP was
made in Japan and Indonesia in 2005 and 2008, respectively. However, as of 1st January
2013, differences still remained and both countries had not made any firm decisions as to
when they would mandatorily require IFRS for public listed companies. Japan should have
made that decision in 2011 but in June 2011 the Japanese FSA delayed the decision for the
foreseeable future following US indecision (FSA, 2011). Indonesia should have made that
decision in 2012 but up until April 2013 such a decision had not been made by the
Indonesian FSA or DSAK. Appendix 2 provides a comparison of IFRS adoption history
and the institutional arrangement of the sample countries.
These six countries also represent two blocks of countries: developing and developed
economies. The developed countries, Japan, Canada and the US, have stronger standard-
setting institutions and capital markets than the developing countries: Indonesia,
Philippines and Brazil. It is important to include these two blocks of countries as research
evidence has suggested that more powerful countries are likely to adopt IFRS (Ramanna
and Sletten, 2009)
5.4 Research design
This research is designed as an inductive interpretative study. In a qualitative study, a
researcher does not begin with a theory to test or to verify. Instead, consistent with the
inductive model of thinking, a theory may emerge during the data collection and analysis
phase of the research or be used relatively late in the research process as a basis for
comparison with other theory (Creswell, 1994).
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The theories used in this study (discussed in Chapter Four) were selected during the
data analysis and ‘writing’ phases of the study and not plotted at inception. The inductive
research process of this research study is illustrated in Figure 2 below:
Some single country case studies of IFRS adoption have utilised the notion of
isomorphism of institutional theory (DiMaggio and Powell, 1983) to frame their research
(Collin et al., 2009; Hassan, 2008; Mostafa Kamal, 2008; Mir and Rahaman, 2005; Albu
et al., 2013; Albu et al., 2011). Although the researcher was fully informed of such work,
she attempted not to make the isomorphism of institutional theory a coat closet theory
(Maxwell, 2005), that is, a coat hook in the closet where the researcher can ‘hang’ the
data. Instead, the researcher used the data to refine a quite broad generic theory of
institutional work.
Source: Adapted from Creswell (1994)
Researcher gathers information:
Previous research papers, reports and
other documents
Researcher asks questions
Researcher forms categories based on the
common themes from data analysis
Researcher compares patterns with other theories
Researcher looks for patterns between
country case studies
Iterative
process
Figure 2. Inductive research approach adopted in the study
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5.4.1 Research questions
Research questions specify what a researcher wants to understand by doing the study
and in qualitative inductive research, they are very important and directly link to other
components of the research design (Maxwell, 2005). Qualitative researchers often do not
develop very specific research questions until a significant amount of data collection and
analysis have been conducted (Maxwell, 2005). This does not mean the researchers begin
their fieldwork with no questions at all. Qualitative research usually starts with a central
question or a broad question that demands for an exploration of the central phenomenon or
concept in a study (Creswell, 2009).
For this study, the researcher started the study with the following broad question:
‘Does quality dominate standard setting adoption processes’. After data was collected
through document analysis and preliminary interviews, more focused questions were
developed along the way. As argued by Maxwell (2005), well-constructed research
questions are generally the result of an interactive design process, rather than being the
starting point for developing a design. Below are the three research questions of the
thesis:
Research Question 1: How did the decision to adopt (or not to adopt) IFRS emerge in
these 6 selected countries, which actors were involved in the process and what factors both
endogenous and exogenous, determined the decision?
Research Question 2: How prominent were arguments about the relative quality of
IFRS vs. US GAAP (or the local GAAP) in debates over IFRS adoption and did other
issues have greater prominence?
Research Question 3: What can be gained from detailed investigation of the process
of IFRS adoption in individual countries in terms of:
c. better explaining the processes through which IFRS has become a global
accounting standard; and
d. improving our understanding of institutional change and the dynamics of
institutional work in the regulatory field?
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These three research questions were then used as a guideline in developing interview
questions for the respondents.
5.4.2 Data collection
Data collection in case study research is typically extensive, drawing on multiple
sources of information within a bounded system. The data collection steps include setting
the boundaries for the study and collecting information through unstructured or semi-
structured observations, interviews, and analysis of documents, and visual materials
(Creswell, 2009). In this study, the boundary was set on particular settings in selected
countries, which is the period prior to IFRS adoption. The preliminary data collected
sought to reveal the process in each country which took place with respect to the IFRS
adoption year. The IFRS adoption year (for example, for Canada it was 2011) became the
starting point for when data was collected and stretched back to a point in the past when
IFRS adoption was first formally debated (for example, for Canada it was first debated
formally in 2004).
The main analytical approach of the study involved analysis of archival and
documentary data, where the main data source for the study comes from the documents
produced by standard-setters, documents (reports, speeches, minutes of meetings ) issued
by international organisations such as the World Bank and IASB, newspapers and
magazines, and other relevant materials (see Table 6). Findings from such analysis are
complemented by in-depth semi-structured interviews with decision-makers in all sample
countries, especially where only limited information was provided by publicly available
documents. This research also utilised some audio materials, such as podcasts of meetings.
Some documents were collected during the fieldwork phase in Indonesia, the
Philippines and Japan. Other documents were collected from the organisation’s website,
for example the US SEC website. Sometimes the respondents provided information by
emailing certain documents which had been referred to during the interview.
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Data types Examples How the information from the data
was used in the study
Observation
of meetings
DSAK meetings To understand the nature of how the
board make decisions in the adopting
process.
IFRS Advisory Council
meeting
To understand the international
response to the Japanese FSA
presentation on their market
competition mechanism.
World Standard-setters
meeting
To understand the relationship
between the IASB and other national
standard-setters.
To learn how national standard-setters
use the platform to lobby IASB on key
issues
International Forum of
Accounting Standard-setters
Asian-Oceanian Accounting
Standard-setters Group
IFRIC meeting To understand how DSAK fought for
their implementation issue
‘Accounting for Land’.
Interview Face-to-face at the
respondent’s place of work
To gather historical information on the
adoption process and the issues
debated in the process.
To validate information from the
documents related to actors involved
in the process.
To validate the analysis of the story.
Face-to-face outside
respondent’s country (in
London/Europe during
standard-setter’s conference)
Phone interviews
Documents Published speeches by actors Major source of information to set up
the IFRS adoption timeline, identify
the actors, the issues debated, and
discuss actors’ points of view on key
important adoption issues
Discussion papers/ invitation
for comments/reports issued by
standard-setters or regulators
Comment letters to the
standard-setters or regulators
Minutes of the meetings
Report issues by international
organisations such as World
Bank ROSC
Magazine articles
Memoirs of the actors
Books/articles/research
published by the actor
Articles from the web-based
newspapers and the websites
of professional associations
Audio Recording (podcast) of IFRS To understand the reaction of the
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Materials Advisory Council Meeting international community towards the
decision of Japan in 2011 to abandon
their IFRS adoption plan.
Recording (podcast) of IASB
meeting
To understand how the IASB deals
with implementation issues from new
adopted countries.
Table 6. Data types utilised in the study
Each country has a different level of richness for the information provided in the
documents. Canada and the US, for example, have extensive documents available on the
standard-setters’ website in terms of reports and press releases which informed the IFRS
adoption process. For other countries like Indonesia and the Philippines, the IFRS
adoption processes were not well documented or if such documents available, they were
not available as public document, thus the interview played a more important role as the
tool for collecting data.
5.4.3 Selection criteria of respondents and their profile
As the objective of this research is to understand the IFRS adoption process,
interviews with involved actors become a pivotal data source, in some countries more than
others. Various documents, reports and speeches were used to identify individuals who
were involved in the process. These individuals were past and current members of national
accounting standard boards and senior market regulator officials, such as chief
accountants. Then, the initial invitations were sent, mostly through email, explaining to
them the nature of the research and asking people if they were willing to be interviewed.
This study employed a snowballing interview method which is widely used in
qualitative sociological research (Biernacki and Waldorf, 1981). The snowballing method
yields a study sample through referrals among people who share the same knowledge, or
in this study, among those who were involved in the same process. This method is suitable
when the focus of the study involves a sensitive issue (Biernacki and Waldorf, 1981). In
this study, respondents were sometimes reluctant to admit that they were once in
opposition to the adoption of IFRS. Interviews with past IFRS opponents had to be
sensitive to the fact that they are now connected to what is represented as the ‘losing’
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team. In contrast, IFRS supporters were usually eager to be interviewed and usually
recommended other IFRS supporters to be contacted.
During the interview, other names usually came up or the researcher asked participants
at the end of the interview for further recommendations and if the respondents were
willing to introduce the researcher to other potential respondents. Many respondents
voluntarily provided the contact details of their colleagues for potential interview. Often
the names recommended by respondents were already on the interview list, which then
served as a confirmation of the preliminary research work. The interviews generally
stopped when the incremental knowledge was diminishing and the researcher was satisfied
with the information gathered in terms of answering the research questions. Table 7
provides information about the respondents based on their nationality and affiliated
institutions.
Respondents
Affiliated
Institutions
Nationality of Respondents
PH BR INA CA JP US Others
Respondents
based on
Affiliations
IFRS
Foundations*) 0 2 0 0 3 0 1 6
National
Standard-setters 3 1 14 4 4 2 28
Regulators 3 2 2 1 2 2 12
Academics 1 0 1 0 2 1 5
Auditors 5 0 1 0 0 0 6
Accounting
Association**) 1 0 4 0 0 0 5
Others 0 0 0 0 0 0 1 1
Total number of
respondent 13 5 22 5 11 5 2 63
Note: PH is the Philippines, BR is Brazil, INA is Indonesia, CA is Canada, JP is Japan and US is the
United States America
*) Including member of IASB, Advisory Committee, Interpretation Committee and staff of
IFRS Foundation.
**) Including the elected council member and staff
Table 7. Respondents’ profile by country and institutions
Sixty-nine interviews were conducted with 63 respondents, with some respondents
interviewed more than once in follow-up interviews. Most of the interviews (78%) were
conducted face-to-face and the others (22%) by phone. The face-to-face interviews were
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conducted in the respondent’s country (at their office or home) and few interviews were
conducted in Europe (London and Brussels) when the respondents had travelled for
business purposes. The phone interviews were conducted by the researcher in Manchester.
The interviews ranged in time from 30 to 120 minutes. All interviews were recorded with
the respondent’s prior approval. Appendix 1 provides details about the interviews with all
respondents in a chronological order.
5.4.4 Gaining access and interview procedure
Gaining access to respondents was the main challenge of this research, especially as
the individuals involved were senior officials in the government or the standard-setter
bodies. Access to respondents was obtained from the personal network of the researcher as
well as through other respondents. The research also received helpful direct support from
the professional accounting associations in Indonesia and the Philippines in terms during
the field work.
Attending standard-setters meetings and conferences was important for gaining access
to respondents as well as for becoming attuned to key international debating issues on
IFRS adoption. During the fieldwork phase in Indonesia, the researcher observed some
meetings of DSAK. Unfortunately, during the shorter fieldwork phase that took place in
the Philippines and Japan, there were no accounting standard-setter meetings held at that
time. Most of the standard-setter conferences, such as one the organised by Asian-
Oceanian Accounting Standard-setters Group (AOSSG), would only allow members of
standard-setter bodies to attend and participate. However, the Indonesian Institute of
Accountants supported this research study by nominating the researcher as the
representative of the DSAK at these conferences.
Creswell (2009) argued that in gaining entry it is important for qualitative researchers
to disclose their past experiences to the respondents. In the initial emails to the
respondents, the nature and the purpose of the research was explained as well as the
researcher’s current role as a technical advisor for DSAK. Upon receiving their
confirmation that they were willing to be interviewed, the interview questions were sent to
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each interviewee together with the information sheet and the consent form a few days
prior to the interview.
Before the interview commenced, the researcher always made sure to ask if the
respondents were comfortable with the interview being recorded. All respondents agreed
to be recorded. A few respondents asked for the recorder to be turned off whenever they
mentioned something confidential. Most of the respondents were comfortable for their
names to be mentioned in the thesis with only a few requesting that their name remain
anonymous. A few respondents specified what statements in the transcripts could or could
not be directly quoted in the thesis; such direction was strictly adhered to by the researcher
during the thesis-writing up process.
5.4.5 Data analysis
In a qualitative research, data analysis can be conducted simultaneously with data
collection, data interpretation and narrative report writing (Creswell, 1994; Creswell,
2009). As previously delineated in Table 6, the data for this research is various and
voluminous, covering six countries. Voluminous data is common for qualitative research,
making it important for the researcher to be able to reduce the data to certain patterns,
categories, or key themes and then interpret these together.
For each country, the researcher analysed the timeline of their IFRS adoption history
and identified which organisations and individuals were involved in the process. A
document analysis approach was mainly used at the preliminary research stage before the
interviews took place in order to map respondents to the country’s historical IFRS events
and their role in the adoption process. The documents used in this preliminary step came
from various reports, for example the World Bank ROSC, a jurisdiction profile report by
the IASB, and various reports issued by the standard-setters.
During the interview, the researcher took notes and made a memo after the interview
based on a single interview (or several interviews in one day) to identify the overall issues
and common themes emerging from the interviews. The collection of memos during
fieldwork served as pivotal instrument in analysing the data early in the research process.
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The interviews were then transcribed and studied based on period, themes and countries.
The interview transcripts and the fieldwork notes subsequently became documents which
were consulted from time to time during the writing process.
The initial coding of the interview transcripts highlighted common themes raised by
the respondents. The goal of initial coding was to rearrange the data into categories that
facilitated comparison across cases and in the development of theoretical concepts
(Maxwell, 2004). Through this initial coding, some categories emerged such as ‘the key
actors involved in the debate’, ‘the main argument for IFRS adoption’, or ‘the pressure
from international bodies’, etc. After the analysis of initial coding, broad thematic stages
were identified based on the similar period which: harmonisation, decision, transition and
implementation. Figure 3 illustrates the framework for data analysis in this study.
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All the interview transcripts and notes were analysed using thematic analysis (Rapley,
2011) and five steps were followed at this analytical stage: gaining familiarity with the
data set, generating initial codes, searching for themes, reviewing themes and refining
themes. In analysing the interview transcripts, the researcher distinguished the parts in
which respondents explained about the actors (both individual and institutions) involved
in the IFRS adoption process, the decision-making process of IFRS adoption, and the
arguments debated during the process.
Raw data (transcripts, field notes, etc.)
Reading through all data
Organising and preparing data for analysis
Validating the
accuracy of
information
Description
Hand coding the data
Themes
Interrelating themes / description
Interpreting the meaning of themes/descriptions
Figure 3. Data analysis
Source: Adapted from Creswell, 2009
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Source: Adapted from Rapley (2011)
As illustrated in Figure 4 above, the initial codes were applied to all interview
transcripts and they were developed in to a more refined code of substantive categories.
All respondents in general provided information about the process of decision making,
which institutions were involved in the process and what had been the key arguments
regarding the process. The substantive categories emerged during the cross-country
analysis and when the data was triangulated with other reports or documents. These data
were then re-grouped based on the four stages of adoption for each country, for example:
which actors were involved during transition period and what issues were being
discussed? This analysis increased the researcher’s understanding of what have happened
within countries and across countries at the same stages in the adoption process although
they might not necessarily occur at the same years.
The next step was to define the coded data in to a more general or abstract framework.
This study uses the notion of institutional work (Lawrence and Suddaby, 2006) which
categorises intended action of actors influencing the institutions in to three categories:
disrupting, maintaining and creating. The data (both from interviews and documents) were
analysed using this theoretical categories. While the initial coding allocated the data in
accordance with their countries, in this theoretical coding the data were not restricted to a
Gaining familiarity with the data set
•classified transcript for each country and skim read them
Generating initial codes
•marked the transcript when respondents discuss the institution, the past process, and the arguments
Searching for themes
•themes emerged during the cross-country analysis
Reviewing themes
•During the writing process, some themes emerged in other countries when they were triangulated with other documents
Refining themes
•Go back to the transcript
•additional interview
Figure 4. Thematic analysis of interview data
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particular country case. For example, the same forms of institutional work across countries
were grouped as ‘creating work’.
Although institutional work provided three broad categories of creating, maintaining
and disrupting, the theoretical coding also something of an emergent process. While using
Lawrence and Suddaby (2006) definition of institutional work, some of significant events
influencing the adoption process did not match their definitions. On the other hand some
of forms of institutional work cannot be easily grouped in to one single category as
initially defined by Lawrence and Suddaby (2006). At the later stage of analysis, the
theoretically coded group of data based on their institutional work categories were
analysed by the stage of adoption. For example creating work during the ‘decision’ stage
might took a different form in the ‘transition stage’.
After such codification, the next step was to create a visual image of the emerging
theoretical findings. Diagrams can offer concreate images of ideas and provide a visual
representation of categories and relationship (Charmaz, 2014). The diagram was refined
few times in consultation to the interview transcript and other coded data. The final
diagram, presented in as Figure 6 in chapter ten, serves to illuminate some new
understanding of the process and stages through which IFRS was institutionalised across
different national regulatory fields.
5.5 Writing the thesis
The qualitative research writing process usually see the researcher constantly bouncing
back and forth between phases of analysis and interpretation and it is difficult to
demarcate where one process begins and the other ends (Hesse-Biber and Leavy, 2004).
However, writing up qualitative research with rich data can also serve as a method of
inquiry and discovery (Richardson, 2004). There is no standard format for qualitative
research writing, with Denzin (2004) using the term ‘interpretive realism’ to denote where
authors insert their personal interpretations.
In the present study, the six case studies have been written as four empirical chapters.
The researcher grouped countries based on similarities in the nature of their IFRS adoption
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processes, the institutional arrangements of standard-setters, as well as the amount of
debate between the proponents of IFRS and US GAAP during the process of adoption.
Brazil and the Philippines were grouped together as their adoption process was fast and
ambitious and they shared a similar legalistic mechanism of adoption. Indonesia and
Canada were grouped together as the two countries shared similar standard-setting
arrangements. Japan and the US were each presented in separate chapter because both
offers different explanations on the mechanisms of achieving one set of global accounting
standards.
Within each case study, the story has been presented in chronological order based on
the timeline and historical milestones of IFRS adoption in each country. In each case
study, the actors involved were discussed as well as the arguments proposed by
respondents as to why IFRS was (or was not) adopted. Each of the empirical chapters
includes a discussion section which provides some form of cross country analysis within
them (e.g. between Indonesia and Canada) or between the Canada-Indonesia group
compared to the Brazil-Philippines group). In the case of Japan and the US, the
international responses to their decisions are also specially discussed. The discussion
chapter (chapter ten) duly synthesises the six country case studies and links them to the
emerging theorising and highlights primary contributions of the study.
The empirical chapters discuss the adoption process in each country based on the four
identified stages of adoption: Harmonisation, Decision, Transition and Implementation.
The four stage framework enables a closer empirical analysis in every country. The
framework is also used in the discussion chapter to locate and analyse the institutional
work across sample countries.
The harmonisation period represents the time when countries developed their own
accounting standards albeit with some influence from the international generally accepted
accounting standard or practices. All the sample countries in this study, except for the US,
experienced the harmonisation period before they made the decision to adopt IFRS --
having been harmonising their accounting standards to international generally accepted
accounting standards for quite some time before formally switching to IFRS. US GAAP in
the 1990s was the ubiquitous international standard and was the main reference for these
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countries in developing their national GAAP. The harmonisation usually emerged from
US textbooks which were distributed through the countries accounting education systems
as well as through the economic and trading relationships with the US (Diga, 1997;
Tuanakotta, 2007; Rodrigues et al., 2012).
After various years of harmonisation, the sample countries (with the exception of the
US) made a decision to abandon US GAAP and fully adopt IFRS or converge their
standards to IFRS. Some countries needed several years before IFRS adoption was firmly
decided. Countries with larger financial markets such as the US and Japan seemed to be
more reluctant to adopt IFRS. During this decision period, the IFRS proponents and
opponents involved in the debate why the country need to adopt IFRS and not continue the
status quo of harmonisation.
Following the decision to adopt IFRS, all countries entered the transition period. Some
countries can have short and chaotic transition periods as in the case of Brazil, or a long
five-year transition period as in the case of Canada. The transition period started from the
time when the IFRS adoption decision was announced to the public, or the law was
ratified, until the IFRS target year. For example Canada made a firm decision in 2006 that
full IFRS would be adopted by 2011, thus Canada had a five-year transition period.
During the transition period, new developments could emerge from the internal or
international arena which force a country to refine or revise its previous decision. For
example Japan in 2009 made a roadmap suggesting how IFRS would be mandatory in the
future and that US GAAP would be prohibited. However during the transition period new
developments emerged, forcing Japan, in 2011, to rescind its previous decision and to take
a market competition pathway later on. Another example is Canada, where during the
transition period the authorities decided that some industries should be exempted from the
IFRS mandatory adoption. Indonesia during the transition period refined its definition of
‘convergence’.
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As the transition stage may create surprises and alter the decision, thus the two-way
arrows between the decision period and the transition period were added. The four stages
are illustrated in Figure 5 below:
Figure 5. Stages in IFRS adoption
The period after the IFRS target year is the implementation period. That would be the
period after 2011 for Canada, 2012 for Indonesia, 2010 for Brazil and 2005 for
Philippines. Japan and the US situations are more complicated. Japan and the US at some
point of time have issued a roadmap to adopt IFRS in 2009 and 2008 respectively.
However Japan and the US have not yet fully adopted IFRS at the moment, thus they are
still in what is now a lengthy transition period.
5.6 Reliability and validity assessment
Qualitative validity means that the researcher checks for the accuracy of the findings
by employing certain procedures, while qualitative reliability indicates that the
researcher’s approach is consistent across different researchers and different projects
(Gibbs, 2007 in Creswell, 2009). In this study, the validation of findings occurs
simultaneously throughout the research steps, as illustrated by Figure 5.1. Nevertheless,
this section discussed the efforts made by the researcher to ensure the reliability and the
validity of the research.
This research study’s reliability depends on the access to the right respondents. The
study investigated the process of IFRS adoption, which often took place a few years in the
past. Some of the key decision-makers have retired from their position; one IFRS
opponent in Indonesia, for example, passed away a few years ago. Thus, it is very
Harmonisation Period
Decision Period Transition PeriodImplementation
Period
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important to be able to identify the key people who were involved in the decision-making
process and be able to interview them. The researcher had interviewed these decision-
makers in each country including, for example, the former and current chairmen of
accounting standard-setters as well as the chief of accountants of capital market regulators.
Yin (2009) suggested that qualitative researchers should document the procedures of
their case studies to ensure reliability across case studies. The researcher in this study kept
a research diary to document major ideas which developed throughout the research
journey. The case study protocol in this study was quite straightforward. First, the
researcher identified the key people involved in the process from documentary analysis or
other respondents’ recommendations. Second, the researcher interviewed these people
until the incremental knowledge diminished and she had gained a suitable quantity
information to address core the research questions. Validity threats in qualitative research
are the particular events or processes that could lead to invalid conclusions (Maxwell,
2005). Some strategies to diminish validity threats employed in this research were as
follows:
1. Triangulation of data. Collecting data from different sources of information has
been highlighted as a validity strategy in qualitative research (Maxwell, 2005;
Creswell, 2009). This research used several data resources to gather evidence
throughout the empirical research phase, especially in terms of identifying key
respondents and building the historical timeline of each case study. For example,
for the case study of Indonesia, various reports and media articles identified the
chairman of the Indonesian Institute of Accountants as the mastermind of the IFRS
adoption plan in Indonesia. This was confirmed by various respondents when they
answered the open question ‘which person in Indonesia is most responsible for the
IFRS adoption decision?’ Likewise in the Philippines, respondents could pinpoint
the name of one person, where in Canada, respondents indicated that the decision
was a more collegial decision after a long and extensive public consultation
exercise.
2. Member checking. Respondent validation is an effort to systematically solicit
feedback about the data and the conclusions of the research from respondents
(Creswell, 2009; Maxwell, 2005). Member checking is an important step employed
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in this study. At the end of each interview, the researcher usually provided her
conclusions about the interview and asked respondents if they agreed with her
conclusions. In many cases the researcher also sent a follow-up email to confirm
the conclusions and ask for further clarification. The researcher also cross-checked
the general conclusions she had generated after interviewing respondents from one
group (standard-setters) with respondents in another group (regulators). For
example, after interviewing some members of the AcSB, and the respondent from
Canadian regulator as well as reading various reports, it was possible to conclude
that the standard-setter was the one who initiated the IFRS adoption.
3. Long-term involvement. Long term participant observation provides more complete
data about specific situations and events (Maxwell, 2005). Long-term involvement
also built more trust between the researcher and respondents. Many of the
respondents in this study have known the researcher since 2009, sometimes longer.
The researcher’s participation in several international standard-setters meetings
began in 2009 and the researcher’s participation continued during her doctoral
period. The researcher’s activity in such international standard-setter conferences
allowed her to gain insights which are rarely obtained from official reports or
media coverage of the events.
4. Peer review. This research uses peer review as an external check on the research
process and findings. Throughout the research process, the researcher worked
closely with her supervisors, especially during the data collection phase supervisor
feedback on fieldwork notes was used to refine the interview questions. The
researcher also promptly discussed with her supervisors the general conclusions
derived from the interviews with key respondents, which then generated follow-up
questions. Besides supervisory feedback, the researcher received constructive
feedback from participants at two doctoral events and two academic conferences25.
All this helped to strengthen the developed theoretical frameworks, and the
framing of key research findings.
25 Researcher presented the research at MBS Doctoral Conference 2012, APIRA Doctoral Colloquium
2013, APIRA conference 2013, Indonesian Scholar International Convention (ISIC 2013), Masterclass
Workshop at University of Newcastle 2014, and Aston Business School 2015.
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5.7 Conclusion
This chapter has delineated the research methodology employed in the study and its
emphasis on an in interpretivist epistemology and constructionist ontology. The chapter
discussed how the research paradigm influenced the methods and procedures employed in
the fieldwork, and the strategies used to analyse the empirical data.
Qualitative, multiple case studies of six countries were conducted to allow for a deep
understanding of the process of IFRS adoption across different contexts. The chapter has
provided a detailed explanation of the data sources used in the study and how the data was
analysed. During this process, emergent theories ware tested against obtained data finding
and the existing literature to build core themes. In this way, the process engaged in both
structural and subjective approaches to construe realities. By assessing the methods used
in this research study in terms of the rigour of the data sources, the interpretation process
and the strategies to validate the conclusions, this chapter aimed to raise confidence in the
research findings.
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Chapter 6: Legalistic Mechanisms as Institutional Work in Processes of
IFRS Adoption in Emerging Economies: Case Studies of the Philippines
and Brazil
6.1 Introduction
IFRS adoption processes in the Philippines and Brazil were amongst the fastest and
most ambitious adoption processes in international accounting history. After adoption, the
Philippines and Brazil mandated IFRS for the financial statements of all listed and non-
listed companies (with certain requirements), as well as consolidated and individual
companies. Consequently, local GAAP ceased to exist. This was ambitious compared to
some jurisdictions such in Europe, where IFRS is required only for consolidated financial
statements. Some countries also decided to retain their local GAAP as an option for non-
listed companies, but in the Philippines and in Brazil, only IFRS was made available to
companies. IFRS for SME’s became an option a few years after adopting IFRS in these
two countries.
This chapter is the first of four empirical chapters, and will discuss the IFRS adoption
process through legal mechanisms in the Philippines and Brazil. The IFRS adoption
processes in these two countries have similarities in many respects. For example, the
decisions to adopt IFRS were supported by the enactment of a law stipulating that the
standard-setter should adopt a set of international accounting standards. This chapter will
analyse how IFRS adoption was decided upon in the Philippines and Brazil. The study has
found that the decision to adopt IFRS in Brazil and the Philippines drew little debate or
resistance from supporters of US GAAP. The decisions to adopt IFRS were heavily
influenced by the recommendations of international bodies such as the World Bank ROSC
for the Philippines and the World Economic Forum for Brazil. The wide support for IFRS
adoption and the lack of a contra-argument for non-adoption may have arisen from the
strong legal support in favour of adoption. A strong legal mandate is not a significant
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factor in other sampled countries included in this study such as Indonesia and Canada,
which will be discussed in the next chapter.
Another finding of the study is that both Brazil and the Philippines established a new
standard-setting body following the adoption of IFRS. The fact that the decision to adopt
IFRS precipitated the creation of a new institution is not unique to Brazil and the
Philippines. Similar institutional developments are evident in other countries such as
Japan, and Korea. IFRS adoption of the standards in some cases also involved the
adoption of the standard-setting model and governance of the IASB. An earlier example of
this tendency was the establishment of the Korean Accounting Standard Board (KASB) in
1999, following pressure from international donors to adopt IFRS as part of the bailout
package (See Rodrigues et al., 2012). The case of Indonesia provides another example: the
standard-setter created an interpretations committee mimicking the IFRS Interpretations
Committee (IFRIC) in 2009 after the country made a decision in 2008 to adopt IFRS.
This chapter begins with some background information on both accounting standard-
setting arrangements in Brazil and the Philippines before the adoption of IFRS. The
second section discusses the IFRS adoption process, how the decision was executed and
which actors were centrally involved in the decision-making process. The chapter
concludes with a discussion comparing and contrasting the process in Brazil and the
Philippines and how the case studies will improve our current understanding of IFRS
diffusion as a global accounting standard.
6.2 IFRS adoption in the Philippines
The Philippines was colonised by Spain for almost 400 years (1595-1898), followed
by the US for about 50 years (1898-1946). The US designated the Philippines as a major
non-NATO ally, and there still exists close security ties between the two nations (U.S.,
2014). The US is amongst the Philippines’ top trading partners and has been its largest
foreign investor. The Philippines has been among the largest beneficiaries of US
programmes which support developing countries specifically by providing preferential
duty-free access to the US market. Key Philippine exports to the US include
semiconductor devices and computer peripherals, automobile parts, electrical machinery,
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textiles and garments, wheat and animal feeds, coconut oil, as well as information
technology and business process outsourcing services (US, 2014).
The economic, historical and political ties between the Philippines and the US had a
profound and pervasive impact not only on the development of accounting in the
Philippines, but more importantly on the institutional and cultural character of the country.
The Philippines legal and political structure, for example, shares certain commonalities
with the US (Valcarcel and Manabat, 2005). Its education system was also developed from
the system established by the Americans during the colonial period (Diga, 1997). In the
case of accounting education, US accounting textbooks and US-trained academics
facilitated the dissemination and acceptance of American accounting concepts and
practices (Diga, 1997). Previous research which classified the country into clusters
according to similarities between their accounting standards and practices usually places
the Philippines in the same cluster as the US (Nair and Frank, 1980; Nobes, 1983). Nair
and Frank (1980) clustered the Philippines in the US model, together with Canada,
Mexico, Japan, and Panama. Another example of the close relationship with the American
accounting system was the establishment of the PICPA (Philippines Institute of Certified
Public Accountants) in 1929, which was patterned after the AICPA. Even the first
president of the PICPA was an American who worked in the Philippines, W.W.Larkin, the
senior partner in the US accounting firm of Clark & Larkin (Diga, 1997).
6.2.1 The harmonisation period: 1996-2000
Prior to 1996, financial accounting standards and practices in the Philippines were
modelled largely on US GAAP. The accounting standard-setting council, the ASC in
Philippines decided to harmonise their standards with IAS in 1996. This decision was an
unexpected one at the time as the accounting education was very much based on the US
GAAP. Even ten years later, in 2006, the Philippines still had a dearth of textbooks on
international accounting, as observed by a World Bank report (World Bank, 2006).
Under its IAS project, the ASC was to replace US-based standards and it started to
adopt IAS on a standard per standard basis, in accordance with the specific needs of the
country concerned. The first IAS adapted and incorporated into Philippine accounting
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standards was IAS 19, Employee Benefits in 1996 which was adopted as SFAS 24 in the
Philippine accounting standard (ASC, 1999). Since then, the Philippines had gradually (in
stages) been harmonising their local standards with IFRS. They have, however, not
adopted the standard verbatim--adjustments were made to them:
“Our local standards were called SFAS, (similar to) US GAAP. So SFAS 1 to 23 if I
am not mistaken, those are still under US GAAP, most of them. Then starting, I think,
with (SFAS) 24 onward, those are IAS influenced standards, so basically (it was)
patterned after IAS. So even [in] 1996 I think those (SFAS) 24 , 25, 26 were issued….
Then in 1997 we came to the commitment. Then between that time until [the] year
2000 if, I am not mistaken. [In] 2001, we started adopting IAS standards by batch. In
2001, we had six (standards). So we have batches of standards that we adopted in to
Philippine GAAP.” (Interview with partner of SGV (member firm of EY) on 12th
February 2012).
Since IAS 19 adoption in 1996, the Philippines had made the IAS their main reference
and they only look in to US GAAP whenever the IAS were silent on a particular issue.
The shift from US GAAP to the IAS as the main reference was a critical point in the
Philippines accounting history. As was discussed in chapter two, the IASC was starting to
emerge at that time offering a claimed set of principled based standard. For a country at an
early stage of its standard-setting with limited resources, the ‘internationality’ of IAS was
more attractive compared to US GAAP. The decision was heavily influenced by the
chairman of the ASC at that time, Charlie Alindada. As he explained during the interview
he recommended the council to adopt IAS:
“There were discussions everywhere that there was standard overload (US GAAP)
already at that time. The second reason (was because) US. GAAP is for US
companies, they never took into account other companies. US GAAP is for [the]
US. So, why do you rely on to something when [the] IASC is emerging already…
why should we stick to the US only?...that there are so many things that we do not
understand, we’ll copy but we don’t understand and then it is not made for us, it is
meant for America. No way did the FASB say US GAAP was for the world, right?
So why should we be dependent on something purely US? It may be good but we
don’t understand it.” (Charlie Alindada, interviewed 15th February 2013).
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Following the adoption of IAS 19 in 1996, the Philippines adopted the IASC’s
standards on borrowing costs, and construction contracts. However, US GAAP was still a
key reference point when the IASC did not have a particular standard that the Philippines
needed, for example, it adopted two FASB insurance accounting standards in 1996: FASB
Statement No.60 Accounting and Reporting by Insurance Enterprises, and FASB
Statement No 113, Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts (ASC, 1999).
6.2.2 The decision-making period: 1998/1999 and 2004
The period from 1996-2000 could be classified as a harmonisation period in which
various created piecemeal amendments were made to Philippine GAAP. However the
Philippines Securities Exchange Commission (SEC) realised that the piecemeal
amendments would make their accounting standards mixed between US GAAP and IFRS.
So they decided that IFRS had to be adopted in full and US GAAP should be eliminated
entirely at some point in the future. According to the Chief Accountant of Philippine SEC:
“I think one the reasons if we will not adopt it in full, there will be convergence
within the local adoption. So our accounting standard[s] will be composed of US
standards also will compose of IAS, piecemeal on a piecemeal basis. So it make a
lot of differences. Of course that may be abused by some of these corporations.
And I think that’s the main reason also why we had to really commit or to agree on
one set of standard at given point.” (Interview with Chief Accountant of
Philippines SEC, 14th February 2012).
The Philippines SEC made a commitment to the International Organisations of
Securities Commissions (IOSCO) in 1998/1999 to fully adopt IFRS by 2005. An interview
with the Chief Accountant of the Philippines SEC revealed that before this commitment
was issued, internally the Philippine SEC had evaluated the advantages of adopting IFRS
“Actually the [SEC] commisioners, before we agreed to the [IOSCO] commitment,
had evaluated the advantages of having one set of financial reporting standards.
Because of the foreseeable cost of doing transactions, competitiveness it bring to
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our domestic corporations, all of these things are considered.” (Chief Accoutants
of the Philippines SEC, interview 14th February 2013).
In 2001, the World Bank’s assessment revealed that the Philippines SFAS still had
some gaps with its IAS counterparts, although in broad terms it was consistent (World
Bank, 2001). Amongst the recommendations of ROSC 2001 by the World Bank was the
full adoption of IFRS without any modification or any adaptation [p.12]. The
recommendation for full adoption was claimed by the World Bank to improve the
compatibility with IAS as stated on page eight of the report: “as international standards are
adapted to national circumstances, full IAS compatibility is often lost”. Since 2001, the
ASC worked towards the full adoption by adopting standard in batches to aim the full
IFRS adoption in 2005.
Respondents in the Philippines argued that the decision to adopt IFRS for the
Philippines was mainly driven by the recommendation in the World Bank ROSC. The
World Bank ROSC and IOSCO were very influential in the Philippines decision-making
process, that confirms similar findings in other developing countries such as Bangladesh
which identified the World Bank and the ADB as international organisations pressuring
them to adopt IFRS (Mir and Rahaman, 2005).
Upon the recommendation from the World Bank, the country decided to ratify the law
to adopt IFRS as mentioned by the chairman of the Board of Agency (BOA) during the
interview:
“ROSC report suggested many things. They reviewed our accountancy law. [...]
they said that the recommendation is for the Philippines to adopt IFRS by law. So
there was the accountancy law in 2004 which prescribed adoption of IAS and best
practices. So it’s adoption by law. But prior to that, our SEC had committed in
their IOSCO meeting saying that we will adopt IFRS, we will adopt these rules, it
is a commitment of the government. Apart from this commitment, the ROSC team
came over and suggested that we study what will be good for the country and the
consultant at that time recommend that we should adopt IFRS and we have to have
a law to make it enforceable.” “The Chairman of BOA, Interview 11th February
2011).
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The Philippine Congress ratified an Accountancy Act in 2004 providing a mandate for
the BOA to adopt international accounting and auditing standards. The Accountancy Act
2004 (otherwise known as the ‘revised accountancy law’) stipulated the power and
functions of the BOA in Section 9 of its documentation. The main function of the BOA
was stated to develop accounting standards and regulate the accountancy profession in the
Philippines. The adoption of international accounting standards was mandated by the Act,
requiring the BOA:
To monitor the conditions affecting the practice of accountancy and adopt such
measures, including promulgation of accounting and auditing standards, rules and
regulations and best practices as may be deemed proper for the enhancement and
maintenance of high professional, ethical, accounting and auditing standards:
Provided, that domestic accounting and auditing standards, rules and regulations
shall include the international accounting and auditing standards, and generally
accepted best practices; (The Philippines Accountancy Act 2004 Section 9 (g)).
The BOA delegated the authority to develop and promulgate the accounting standards
to the ASC. Although the Accountancy Act did not explicitly state that the international
accounting standard had to be IFRS, the Philippines has been harmonising their standards
with IAS for several years and as the IFRS has also been recommended by the ROSC, the
members of the board decided to adopt IFRS. The transcript of the interview with one of
the ASC's former members depicted her interpretation of the Accountancy Act as follows:
Interviewer: Why do you think the Accountancy Act 2004 stipulated that you
have to adopt [a set of] international standards?
Respondent: (…) One of the functions of the Board of Accountancy is the
standardisation of best practices, which includes international
standards. Not only domestic, but international. The emphasis was
there.
Interviewer: But US GAAP is also an international standard.
Respondent: But there was no ruling at that time that we have to adopt US
GAAP. We did have in our law there was no mention as to what we
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should adopt. So, at that time, they didn’t feel the need to put the
law to adopt US GAAP. Because I mean… We were born with it.
So nobody questioned why we are adopting US GAAP.
Interviewer: But nobody asks questions as to why we are adopting international
accounting standards?
Respondent: Nobody. Because actually I think the belief is that if it’s
international, it’s not just US. It’s all other accounting bodies.
- Member of the ASC on the period of 2004-2011, Interview 11th February 2014
Most of respondents in the Philippines mentioned that there was not any strong
rejection from the stakeholders around 2005 when IFRS was implemented. As reflected in
the interview below with the chairman of the Philippines auditing standard-setter, who
was also an audit partner of one of Big Four firms in the Philippines:
Interviewer: Is there any reservation from the industries in 2004-2005?
Respondents: Perhaps at that time not yet. They were not aware.
- Interview with the chairman of the Philippines Auditing Standards Board, 30th
November 2012
6.2.3 The transition period: 2001-2005
The adoption of IFRS had also encouraged the establishment of new accounting
standard-setter in the Philippines. The derivative of the Accountancy Act 2004, R.A 9298
created the new FRSC which replaced the ASC. The FRSC was formally established by
the BOA in 2006 while the ASC was a less-formal council established and funded under
the PICPA. The ASC had been created in 1981 as an initiative of the chairman of SGV at
that time, who later became the chairman of the ASC for 28 years. In contrast, the FRSC
limited the membership terms to three years, including the term of chairman, although
memberships were renewable. In August 2006, the FRSC established the Philippines
Interpretation Committee (PIC) to assist the FRSC in issuing implementation guidance on
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PFRSs (Philippines Financial Reporting Standards). While FRSC members were
appointed by the BOA, members of the PIC were appointed by the FRSC.
After a gradual adoption which began in 2001 the FRSC completed adoption of the
IFRSs issued by the IASB in 2005. That year, all companies both listed and non-listed
were required to adopt IFRS as published by the IASB at that time with very little
transitional relief provided. The transitional relief included the permission to amortise the
transitional liability for defined employee benefit planning for a period up to five years.
Commodity hedges of mining companies entered into prior to 2005 were exempted from
accounting under IAS 39 and for trust fund assets, the valuation provisions only applied as
of 31st December 2005.
The interest of accountants and preparers in general in participating in the debate over
accounting standards development was very low in the Philippines. Mostly, the exposure
drafts were approved without any feedback or comments from stakeholders according to
one of the respondents.
Interviewer: Did you get any feedback, comments (from the exposure
drafts)?
Respondent: “Zero to very few, based on my personal experience. “
Interviewer: “why do you think people didn’t comment?”
Respondent: “I think it’s more of because of a lack of interest. Sometimes,
they raised concerns or issues when the standards were
already adopted”
- Past Member of IFRSC, Interview 14th February 2014.
Another respondent in a separate interview provided a similar answer:
“We posted on the website the ED, and we used the same deadline as the IASB.
Normally we usually don’t get any feedback.” (FSRC Secretariat Staff, interview
12th February 2013).
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Lack of response from stakeholders does not necessarily mean that users of the
standards were not confronted with technical accounting issues. For example, in the case
of certain complicated standards, instead of raising their concerns to the FRSC, some
companies contacted their auditors. The auditors, especially if they are among the global
Big Four firms would try to answer their client’s questions through their firm’s global
network, or the partner of the firm will raise the issue with the FRSC.
“The reason, probably, why we didn’t get comments is… companies here if they
want to comment, they post it to the auditors. And normally in the Big Four we
have the process of comment. If we have questions, we write on the comments of
EY. We have the network, we send them to EY, and EY consolidates the comments
and sends it to the IASB. I guess that’s how companies here do it…” (Partner of
SGV (EY), Interview 12th February 2013).
Although the IFRS adoption process may have been perceived as fast and ambitious in
the Philippines, two respondents revealed that there were some reservations closer to the
adoption time, dated 1st January 2005. One of the partners of SyCip Gorres Velayo & Co
(SGV), a member firm of Ernst and Young Global Limited since 2002, who was close to
some key decision-makers in the Philippine’s SEC shared his recollections about these
delicate moments in December 2004.
“Yes, (what Philippines had in 2005 was a) big-bang approach. But, it is not as big as
if we had not done our homework earlier. But, it’s still difficult. Because I think I even
recorded, up to the last minute up to December of 2004, when there was still no clear
issues whether it goes or not. So as far as SGV’s concerned, we were ready. But, if
given the choice, we would rather have had more time. But at the same time, we’ve got
SEC Philippine government’s commitment to IOSCO that by 2005 (made) years ago.
And, I think that time there were lobbyists from several sectors, telling the SEC, can
you defer (...) I was talking to some of my friends in the SEC around this time. So, I
think if I am not wrong the SEC memo came out in the last week of that year and the
BSP [Bangko Sentral ng Pilipinas, the central bank] also said, “Okay, we will be
adopting IAS or IFRS 2005, effective from 2005.” (A partner of SGV, interview 12th
February 2013).
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Surprisingly, Washington SyCip the founder of SGV offers a different perspective of
full IFRS adoption in Philippines. As a nationalist, a founder of SGV who is now living
mostly in Washington D.C, SyCip argued that the Philippines does not have to make its
own unique standard but he also went against the full adoption of IFRS word for word.
SyCip expression during the interview:
“What you do must be good for the country. They [ASC] should not adopt
everything. They should do... so (they should) say we adopt this we adopt that, this
we disagree…They should see whether it is applicable or not, it does not matter it
is IFRS or US GAAP. I am not object to foreigners or to foreign capital.”
(Interview with Washington SyCip, 16th February 2013).
6.2.4 The implementation period beyond 2005: New option for non-listed companies
Starting in 2005, IFRS was used in the Philippines with some minor transitional relief
for the standards on employee benefits and financial instruments. However, as most
companies in the Philippines are small and medium-sized enterprises, IFRS was a
particular challenge26. When the Philippines adopted IFRS in 2005, IFRS for SMEs had
not been issued by the IASB. Thus, IFRS became the only standard available for both
listed and unlisted companies.
When IASB issued the IFRS for SMEs in 2009, the Philippines adopted it which
effective from January 2010. Nevertheless, SMEs in the Philippines had already endured a
tough transition time in learning and adopting IFRS in 2005. When the IFRS for SMEs
became an available option for SMEs, there was some confusion amongst SME
practitioners in the Philippines as they had just learned IFRS. As stated by the Director of
the PICPA:
“In 2005, we found ourselves studying all of these (IFRS) because they made it
apply. Well in fact 80% of them (companies) are SMEs, so everybody got confused
and they started using IFRS even for small companies. I said the best thing that
26 Interview with an auditor in the Philippines who serve SME clients, 5th March 2013.
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ever happened (to the Philippines) was in 2009 (when) IFRS for SMEs came.
Everybody was surprised. So now everybody who (started) to get used to IFRS and
moved to IFRS in full, has to move to IFRS for SMEs. So everybody was still
confused. It’s really chaos. I think, even IFRS for SMEs, it should not really be
applied to the really small one (companies), we have to retain the old system for
small ones at least” (Director of the PICPA, Interview 30th November 2012).
In summary, the IFRS adoption in the Philippines had a strong legal mandate following
the ratification of an act of parliament and the clear support of the government. The
Philippines SEC took the initiative to declare the country’s commitment of IFRS adoption
to IOSCO. The biggest accounting firms in the country played a significant role during the
transition period in convincing key decision-makers to go ahead with the decision. Table
X below provides the time line of IFRS adoption in the Philippine. The case of Brazil
offers a different insight from the Philippines as will be discussed in the next section.
Time
Institutions
Decision
1999-2000
Philippine Accounting
Standard Council (ASC)
Adopting IAS in piecemeal basis
1998/1999 Philippines SEC Gave commitment to ISOCO for IFRS
full adoption by 2005
2001 World Bank ROSC was issued providing
recommendations for IFRS full adoption
2001-2004 ASC Starting to adopt IFRS in stages
2004 Philippine Congress Accounting Act was ratified, stipulated
the adoption of international accounting
standards.
2005 ASC IFRS was adopted in full to Philippine
GAAP and IFRS was mandatory for all
companies
2006 Board of Accountancy Established FRSC, the new standard-
setter replacing ASC.
2010 FRSC IFRS for SME is adopted for non-listed
companies in the Philippine.
Table 8. Timeline of IFRS adoption in the Philippines
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6.3 IFRS adoption in Brazil
Brazil, the 7th largest world economy in 2013 has enjoyed high economy growth over
the last decade. In 2012, Brazil had 353 listed companies in its capital market and
although Brazilian companies listed on US stock markets have been decreasing over the
last five years, there were still 26 Brazilian companies listed on the US bourse in 2012
(SEC,2012). The country has been strongly influenced by Anglo-American audit firms in
the past, with such firm bringing with them a strong tradition of audit procedures and
manuals, and the habit of giving training courses to companies on accounting standards
and procedures (Iudícibus and Lopes, 2004 as cited in Beuren and Klann 2010). All this
resulted in certain similarities between the accounting procedures adopted in Brazil, and
those already established under US GAAP (Beuren and Klann, 2010).
However, the US influence came to Brazil only in the 1950s. Prior to 1950s, pre-
modern Brazilian accounting practices had been influenced by European countries (Italian
accounting). Since the end of the 19th century, Brazilian accounting had been influenced
by Italian equity theory which had certain laws in principles (Rodrigues et al., 2012).
Accounting education in the universities was also influenced by Italian accounting. The
heavy influence of continental accounting in Brazil led to accounting practices being
largely governed by tax and corporate law, as well as by regulations formulated by
governmental bodies such as the Brazilian central bank and securities commission
(Niyama and Silva, 2005).
In the 1950s, the US became the most important international partner for Brazil in
building key industrial sectors. The introduction of the automobile industry in Brazil at the
end of 1950s brought with it the adoption of American accounting practices (Rodrigues et
al., 2012). In the period of ‘Target Plan’ between 1955 and 1963, Brazil enjoyed high
economic growth. As more US subsidiaries came to Brazil, accounting education also
started to shift from an Italian to an American approach.
In 1964, Professor Jose Da Costa Bouncinhas of the University of Sao Paulo
introduced a new accounting teaching method following American accounting textbooks.
Accounting education in Brazil started to depart from the Italian school of thought and
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was replaced by American influences. In the late 1960s and the 1970s the Brazilian
volume of trade with the US increased significantly and the influence of US accounting
practices became stronger (Rodrigues et al., 2012).
The modern history of accounting in Brazil began in the mid-1960’s building on the
development of the capital market27 and other reforms in the financial system. These
reforms in the Brazilian financial system included the legal requirement for listed
companies to be audited, the requirement for listed companies to comply with the financial
reporting standards issued by the central bank of Brazil and the enactment of corporate
law28 which was strongly influenced by US GAAP (Carvalho and Salotti, 2012). As will
be explained throughout this chapter, the Brazil’s central bank, Banco Central do Brazil
(BCB) has been an important standard-setter and played an important role in the IFRS
adoption process. In 1972, BCB issued Resolution 220 which included Circular 179
which, for the first time, officially mentioned ‘Generally Accepted Accounting
Principles’. Following the central bank resolution, the Federal Accounting Council’ (CFC)
also issued Resolution 321-72 which adopted the concept of GAAP. In both resolutions,
GAAP was not defined as the US GAAP, however de facto common understanding of
GAAP in the resolutions was US GAAP as taught in accounting education.
The American influence on Brazilian accounting standards was reinforced in 1976
with the enactment of a new Corporation Law (Law 6404). The new law is regarded as a
copy of the Model Business Corporation Act from the US (Rodrigues et al., 2012) and
pivotal in laying strong foundations in the Brazilian capital market. The Brazilian
Securities and Exchange Commission (Comissão de Valores Mobiliários / CVM) was
established in 1976 with the enactment of law 6385 using the regulations similar to those
that were used to create the US SEC (Da Silveira, 2014).
The similarities between US GAAP and Brazilian GAAP were reflected in two capital
market studies. Beuren and Klann (2010) tried to compare Brazilian GAAP with US
GAAP in the areas of recognition, measurement and disclosure requirements. They
compared financial statements of Brazilian listed companies which had dual listing in
27 First Capital Market Act was issued in 1965 (Law 4.728/65) 28 Initial Corporation Law was ratified in 1976 (Laws 6.385/76 and 6.404/76)
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Brazil and the New York Stock Exchange (NYSE). The authors found that financial
statements of 2004-2005, respectively using Brazilian GAAP and US GAAP did not have
any significant differences. Research by Bandyopadhyay et al. (1994) also failed to find
any significant differences between income figures under Brazilian GAAP and US GAAP.
The CFC, as the national accounting profession's organisation produced fundamental
accounting principles in 1981 to replace the term GAAP in the previous Resolution. As
they were ‘compulsory’ and not only generally accepted, the CFC stated that the principles
should be called ‘fundamental’ and they were considered to be necessary in harmonising
accounting principles prevailing in Brazil at that time (Rodrigues et al., 2012). In 1993,
the CFC issued another Resolution replacing the 1981 Resolution, and defining seven
basic accounting principles. However as argued by Niyama and Silva (2005) resolutions
issued by the CFC did not have a strong legitimacy, with the compliance with regulatory
requirements being more important for the financial report preparers. The relationship
between tax reporting and financial reporting was very strong in Brazil. Some Brazilian
companies refused to employ certain acceptable accounting principles for the fear that
they would be challenged by the tax authorities (World Bank, 2005).
Prior to the adoption of IFRS, Brazilian GAAP was very hard to comprehend as
there was no single accounting standard-setter. Before the establishment of the Committee
of Accounting Pronouncements ( CPC) in 2005, there were several different regulators for
firms of varying size and structure and each company was required to follow the
accounting standards issued by their respective regulators. Table 9 below presents the
accounting standards in Brazil before 2005.
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Regulatory
agency
Accounting and
Financial
Reporting
Standards
Audit requirement
Listed Corporations
(S/A)
CVM
BOVESPA
Corporation Law
CVM rule
COSIF
Yes, by auditor registered
with CVM
Non-listed
corporation (S/A)
- Corporation Law No
Limitadas - Civil Code No
Financial
Institutions
BCB Corporation Law
COSIF
CVM rules
Yes, by auditor registered
with BCB and CVM
Investment Funds CVM Corporation Law
CVM rules
COSIF
Yes, by auditor registered
with CVM
Insurance
companies and open
pension funds
SUSEP Corporation Law
CNSP/SUSEP
rules
Yes, by Auditor regulated
with CVM
Closed Pension
Fund
SPC CGPC rules Yes
State-Owned
Enterprise
Ministry of
Planning – DEST
(all)
CVM (listed SOE)
Law that creates
respective SOE
Corporation Law
(for listed SOE)
Yes (Listed SOE)
No (Non-listed SOE)
Table 9. Accounting standards applied in Brazil prior to IFRS adoption
Source: World Bank ROSC 2005
US GAAP was popular among listed companies in Brazil and had been perceived by
the stock exchange as an international standard. The Sao-Paulo Stock Exchange
(BOVESPA) believed that companies preparing and disclosing their financial reports
under internationally recognised standards, i.e. IFRS or U.S. GAAP, would obtain greater
visibility among investors. BOVESPA in 2001 introduced Novo Mercado, the highest
listing segment designed for shares issued by companies that voluntarily undertake to
abide by corporate governance practices in addition to those already requested by
Brazilian law and CVM. One of the additional obligations for Novo Mercado was the
disclosure of a balance sheet, in accordance with US GAAP or IFRS. According to the
World Bank, 54 listed companies in the Novo Mercado segment reported under US GAAP
and only one company chose IFRS (World Bank, 2005). According to the World Bank
report, in 2005, Brazilian GAAP was also less aligned to IFRS compared to its Chilean
and Mexican counterparts.
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In terms with the accounting profession development in Brazil, the CFC is the national
regulator. CFC was created by Law No 9,295 on May 27, 1946 and served a similar role
to the BOA in the Philippines. Accountants are regulated by the CFC through each
regional entity or each state in which each state plus the relevant federal district has
representatives sitting in the council. CFC and IBRACON (Brazil’s Auditor Association)
played a crucial role in the IFRS adoption process in Brazil. IBRACON is the official
entity authorised to translate and publish annual IFRS as issued by the IASB 29 and
therefore it has had a major input in CPC pronouncements30.
6.3.1 The harmonisation period: Before 2006
Before deciding to adopt IFRS in 2007, Brazilian GAAP effectively derived from a
variety of sources, including corporation law and the standards and interpretations issued
by up to eight different institutions. This was highlighted by the World Bank as inefficient
for creating duplication of effort and lack of comparability, clarity and consistency of
financial statements (World Bank, 2005). Brazilian authorities chose to abide by the
World Bank recommendation to adopt IFRS and to set up a single accounting standard-
setter immediately.
Prior to 2005, Brazil did not have one single authority concerned with accounting
standard setting, thus the de facto accounting standard-setter in Brazil was the BCB and
the CVM. The BCB is a powerful institution which supervises 2,078 financial institutions
as of December 201231. Along with the Brazilian SEC, BCB was responsible for issuing
accounting standards and guidance for financial institutions and non-banking listed
companies, respectively.
The decision to harmonise Brazilian standards with the IAS originated at the BCB. An
interview with Amaro Gomez, a former head of the financial system regulation
department of the BCB revealed that the discussion to adopt IFRS for financial institutions
in Brazil started around 1995. In March 2006, the BCB issued Communiqué no. 14.259 to
29As stated in jurisdiction profile published by the IFRS Foundation in their website: www.IFRS.org 30 Mentioned by one of the respondent, member of CPC. 31 Management report of Central Bank of Brazil 2012, available at :
http://www.bcb.gov.br/pre/Surel/RelAdmBC/ing/management_report_2012.pdf, accessed 21st April 2014
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require all financial institutions (including banks, leasing companies, savings and loans
institutions and credit unions) to prepare their consolidated financial statements under
IFRS, effective for the calendar year 2010 (CReCER, 2007).
“The decision by the central bank, in Communique 14.259, was formalised in 2006
but it was a longer discussion about the adoption of IFRS, which started in 1995.
Why 1995? We started discussing [in this department], after the economic
stabilisation process in Brazil, in regard with accounting what would be the best
model of international accounting to be used in Brazil” (Amaro Gomez, Interview
13th July 2014).
In 2002, another department of the BCB established a project to adopt IFRS for their
2006 annual report. The unit in charge of the project was the Financial Administration
Department (DEAFI). The BCB hired Ernst and Young as its consultants for the project32,
and set a target goal in 2003 to publish IFRS based financial reports by 2006. This
adoption of IFRS by the BCB in 2006 was a crucial influencing factor which led Brazilian
President Lula Da Silva to pass the bill on the new accounting law.
In parallel with the regulators moving closer to IFRS, the national accounting body,
Federal Accounting Council (CFC) decided to bring together all standard-setters and
created one single authority in the form of a new council: Comitê de Pronunciamentos
Contábeis (CPC). The CPC was duly established on the 19th October 2005 with the
mission to streamline the process of accounting standard-setting. The CPC is made up of
representatives from the Brazilian association of publicly owned companies (ABRASCA),
the association of analysts and professionals from the capital investments market
(APIMEC), the São Paulo stock exchange (BOVESPA), the Federal Accounting Council
(CFC), the Foundation Institute of Accounting, Actuarial and Financial Research
(FIPECAFI) and the Institute of Independent Auditors of Brazil (IBRACON).
32 The decision to adopt IFRS for BCB financial report is based on BCB Vote No.235/2002. The plan of
the adoption project is available at: https://www.bcb.gov.br/ingles/adequa/projeto_ingles.pdf, accessed 21st
April 2014.
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However the first pronouncement issued by the CPC was in 2008 after the decision on
IFRS had been made. Specifically the aim of CPC stated in CFC Resolution No 1.055/05
is to:
To study, the preparation and issuance of Technical Pronouncements on accounting
procedures and dissemination of such information to enable the issuance of
regulations by the Brazilian Regulatory Authority, aimed at centralizing and
standardising its production process, taking into account the convergence of Brazilian
and International Accounting Standards. 33(CFC Resolution No.1.055/05, Article 3).
Between 2006-2007, the BCB and the Brazilian SEC, together with the insurance
regulator SUSEP made a decision to require all companies under their authority to prepare
and make consolidated financial statements based on IFRS as from 31st December 2010
(Carvalho and Salotti, 2012). Thus, listed companies and financial institutions started to
prepare for IFRS adoption.
6.3.2 The decision-making period: 2007
In December 2007, Brazil issued a major amendment to its corporation law which
marked an important milestone in the adoption of IFRS. Law No 11638 was labelled by
Carvalho and Salotti (2012) as “the most ambitious piece of legislation dealing with
accounting in the past 50 years”. The new law required almost all companies in Brazil to
adopt IFRS; listed and non-listed companies, as well as large (as defined) limited liability
companies.
The bill was passed on the 28th December 2007 with an effective date of 1st January
2008. The timing, lack of a transition period and the degree of IFRS adoption was taken as
a surprise by the people it affected, as one of respondent stated:
“We were surprised with the time because we were expecting that it would be
(enacted) in early year of 2008. Instead they enacted the law in 2007 to be
implemented right after two or three days. It was quite chaotic. For example, listed
33 Excerpted from CPC website at 18th April 2014: http://www.cpc.org.br/CPC/CPC/Conheca-CPC
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companies, they have to adopt it for their quarterly financial statements. CVM then
gave them relief to use the old GAAP (for the first quarterly financial statements of
2008)” (Member of CPC, Interview 19th September 2013).
One member of the CPC, Eliseu Martins, had also been involved in the working group
on the revised corporation law, and he shared an interesting behind-the-scenes story of the
ratification of the new law in 2007. Bill No. 3741 had been discussed in Congress for
seven years since 2000, however, the main reason for resistance from limited companies
in Brazil which emerged during long debates, was not about adopting IFRS but about the
requirement to publish the summary of financial reports for all type of companies in the
national newspaper. Most Brazilian companies have said that publication on their
company website is sufficient, especially for non-listed companies, as newspaper
advertisements are expensive.
Eliseu Martins recalled that, in July 2007, President Lula received enquiries from the
audience in the World Economic Forum meeting in Davos, Switzerland about the use of
IFRS in Brazil. The audience highlighted that China was moving towards the use of IFRS.
After that session, the president summoned his financial minister, who also attended the
Davos meeting and asked him about the status of IFRS adoption in Brazil. The financial
minister duly had conference call with the president of the BCB and the president of the
CVM from Davos. The president of the BCB then said that they were aware of IFRS and
in fact had already used IFRS to produce their own financial report in 2006.
According to Eliseu Martins, the president of CVM told President Lula about the fact
that Brazil had a bill for the adoption of the new company law in congress since 2000 but
it had not been ratified. The bill included the requirement to adopt IFRS. President Lula
firmly believed that the bill should be ratified and upon his return from Davos in July
2007 the bill’s enactment progressed very quickly. In 28th December 2007, the president
signed the law which was to be effective by 1st January 2008.
Although pressure from the president, was pivotal in the decision to adopt IFRS,
members of parliaments also sought a great deal of input from individuals who were
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supporters of IFRS34. Among them was names such as Roberto Taixeira da Costa (a
trustee member of the IFRS foundation), who was invited to speak at the first public
hearing on 20th August 2003. Amaro Gomez, was also invited to the third public hearing
of the bill on 17th May 2007 and he later became a member of IASB in July 2009.
The arguments raised in parliament in favour of the bill to adopt IFRS were
widespread, including its adoption in many countries after the Asian financial crisis, and
the mega accounting scandals of US corporations. The decision from other jurisdictions
who had adopted IFRS (the bill mentioned the European Union, China and Russia) as well
as the convergence efforts between the IASB and the FASB (following the signing of their
MoU in 2006) were highlighted in the bill as incentives for Brazil to adopt IFRS35. It is
important to note that there is no evidence of any specific references to the quality of IFRS
when the bill was discussed in the period prior to adoption.
In the interview, most respondents admitted that there was no strong resistance to the
adoption of IFRS in Brazil, as being stated by one of respondent below:
“I would say that there were some arguments. But it was very, very, very small.
During the public hearings (of the bill), all, even the private companies listed in
the US they were in favour for IFRS adoption. That little argument is not
something IFRS versus US GAAP. It was just people saying that our accounting is
good and they think it is not necessary to go to international level as it brings a lot
of problems. We will lose our ability to do our own accounting and some
arguments like those.” (Eliseu Martins, Interview 21 October 2013).
Another member of the CPC from IBRACON, also mentioned that auditors in Brazil
supported the adoption of IFRS. This was despite the close relationship between the
Brazilian auditing firms and their US counterparts:
34 Page 5 and 7 of document PRL 1 CFT – PL 3741 – 2000 document available from
http://www.camara.gov.br/proposicoesWeb/prop_mostrarintegra?codteor=447237&filename=PRL+1+CFT+
%3D%3E+PL+3741/2000 (accessed 18th April 2014) 35 Page 7, ibid.
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Interviewer: If we are talking about before 2007. I guess there are many Brazilian
auditors that are expert in US GAAP more than [those who are] experts
in IFRS?
Respondent: Sure.
Interviewer: How did they react when Brazil made the decision to adopt IFRS?
Respondent: They supported the decision; they were part of a decision process. So,
not a big deal. In the IFRS world, if you were expert in US GAAP, your
transition is easier than when you are expert in IFRS then you learn US
GAAP
- Member of the CPC, Interview 19th September 2013.
6.3.3 The transition period: 2007-2010
Compared to other countries in this study, Brazil has the shortest transition period.
Upon enactment of the law, the CPC started to work on adopting IFRS, issuing the first
‘batch’ of accounting pronouncements based on IFRS in 2008. During 2008-2009, the
CPC translated all existing IFRS into Portuguese. Some accounting options in IFRS were
carved-out in the adoption process such as the revaluation model in IAS 16 Property, Plant
and Equipment and IAS 38 Intangibles Assets. Thus, the historical cost model has been
the only measurement option available for property, plant and equipment and intangibles.
On 13th July 2007, the CVM required listed companies to publish their consolidated
financial statements according to IFRS, starting with reporting periods ending in 2010.
Use of IFRS (in Portuguese) would be optional for listed companies from 2007 through
2009. Starting in 2010, Brazilian GAAP ceased to exist and all listed companies were
required to use IFRS. IFRS for SMEs in Portuguese was adopted in 2009 as an option for
SMEs in Brazil.
The year 2008-2010 have been acknowledged as the transition period with full IFRS
adoption in Brazil for financial statements to be completed by the 31st December 2010.
The two year transition period was too short according to another member of the CPC:
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“(For the transition period) I think it needs at least five years. As if you have to
make it a decision, I think you need five years at least and not go to all ways. But I
think you have to keep the simplified GAAP, like other countries are doing.[In the]
UK they still have their UK GAAP for unlisted company.” (Member of CPC,
Interview 19th September 2013).
On 28th January 2008, MoU between IASB, CFC and CPC was signed to improve the
cooperation between the IASB and CPC. One of the clauses in the MoU is excerpted
below:
The CPC and the IASB will establish a formal and continued dialogue, including
regular and periodic face to face, video or telephonic meetings between their
representatives, in order to enhance co-operation and foster greater participation
in the international standard-setting process from Brazil with the ultimate goal of
ensuring acceptance, expediting adoption, and facilitating proper implementation
of new standards or improvements to existing IFRSs under development or to be
developed by IASB. (MoU between IASB, CFC and CPC, page 10).
Although most of stakeholders did not resist for the adoption of international
standard, such transition with only two-year period training was not an easy process for
most companies in Brazil. Accountants with IFRS expertise were scarce which make some
of accounting firms needed to import accountants from Europe to Brazil36. The short
transition period also brought challenges to the accounting education system in Brazil
because the academics and students had been studying “rules-based” accounting standards
(Carvalho and Salotti, 2012). One of the respondents identified the first two-year
transition as “a lot of challenge. It’s not easy”37 . Table 10 below provides the timeline of
the IFRS adoption process in Brazil.
36 Interview with member of CPC and partner of big four auditing firm, 19th of September 2013. 37 ibid
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Time Institutions Decision
2002 BCB Published their own financial report according to IFRS in
December 2006.
3rd October
2005
CVM Issued Deliberation 488. Article 177, para.5 established that
rules issued by CVM should be developed in line with
international accounting standards adopted in major
international securities markets.
7th October
2005
CFC CFC Resolution 1055, The establishment of CPC as the
accounting standard-setter in Brazil
March 2006 Central Bank
of Brazil
Financial intermediaries under its supervision should publish
consolidated accounts in compliance with IFRS by December
2010.
July 2007 President Attended World Economic Forum in Davos, Switzerland and
received enquiries about the status of IFRS adoption in Brazil.
December
2007
Congress New Legislation of Law 11,638 was enacted requiring all listed
companies and all profit-oriented companies who meet certain
requirements to adopt IFRS progressively from 1st January
2008.
28th January
2010
IASB, CFC
and CPC
An MoU was signed to establish “principles of future
cooperation aiming at supporting adoption of IFRS in Brazil
and fostering CPC engagement in the international accounting
standard-setting process”
Table 10. Timeline of IFRS adoption in Brazil
6.3.4 The implementation period beyond 2010: Onerous application of few standards
The implementation period in Brazil was identified by respondents as having been
chaotic. There were a few IFRS new standards which were problematic in Brazil. IFRIC
12 Service Concession Arrangements and IFRIC 15 Agreements for the Constructions of
Real Estate were problematic in Brazil as equally they were difficult to implement in other
countries such as Indonesia and the Philippines.
One of the Brazilian top executives, an accounting controller of a big transportation
company in Brazil shared his view early in the first year of implementation.
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“Absolutely chaotic. We work[ed] very closely with KPMG, doing a lot of
diagnosis. The transition is very short but it was two steps. It was absolutely
chaotic. Depends on the industry, for manufacturing it was no impact. For my
sector, concession was heavily impacted by IFRIC 12. There were huge changes in
the financial statements. Another problem was also with IFRIC 15, huge
problem.” (Brazilian Top Executive, interview 14th July 2014).
Brazil also had implementation challenges with accounting for industries which was
highly regulated by the governments such as utilities companies. Some industries are rate
regulated by the government rules and the entities in such industries were identified as
rate-regulated entities. Rate regulated entities are usually quasi-public sector companies,
such as utilities companies, who provide public services. These companies are usually
owned by the government and provide goods and services which are regulated in term of
price (such as the price of electricity or water), quality or cost of production. In some
countries, companies are allowed to capitalise cost to maintain a certain standard of
quality. The cost then will be recovered in the future based on the new negotiated price.
The account to capitalise these cost is Regulatory Deferrals Account (RDA which may
create Rate Regulatory Assets (RRA) or Rate Regulatory Liabilities (RRL). The practice
varies among countries; some allow utilities companies to recognise RRA and RRL while
other countries do not.
Prior to the adoption of IFRS, Brazilian companies’ booked RRA in their balance
sheets. IFRS did not have a specific standard about rate regulated activities back then in
2010, so most countries including Brazil and Canada adopted US GAAP which allowed
such accounting policy. Rate regulated assets were usually on the balance sheet of
companies in the regulated industries who perform public services on behalf of
governments. In the adoption year, these assets were written off as the consensus among
the Big Four accounting firms was that they were not assets according to the IFRS
Conceptual Framework. According to Big Four in Brazil, such assets could not satisfy the
definition of assets in the IFRS conceptual framework.
However, due to lobbying from stakeholders, mainly from Canada, the IASB in April
2013 issued an exposure draft of IFRS 14 Regulatory Deferral Accounts which allowed
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the use of local GAAP until the IASB issued a comprehensive IFRS about rate regulated
activities. In January 2014, the IASB ratified and issued IFRS 14, but it did not allow
retrospective application which meant Brazilian companies could not put back the assets
and liabilities which had been written off from their balance sheet. Two Brazilian
respondents expressed their frustration during a separate interview.
“Billions of reals were written off. Brazilians are pissed off.“(Brazilian top
Executive, interviewed 13th July 2014).
“They complain … from Brazilian electricity companies, at the end we adopted
(IFRS) earlier and we are required to rip-off all the (regulated) assets and
liabilities because they’re not IFRS compliant. And in a couple of moments later,
they are going to be allowed to retain those assets. It’s not fair.” (IFRS Foundation
staff from Brazil, interviewed 8th September 2013).
The Brazil’s acquiescence to adopt IFRS in full despite the onerous implementation
period was similar to the Philippines. Both countries applied no carve outs in IFRS and no
industry was excluded from mandatory application. Both countries were very committed
to full adoption of IFRS. However the case of rate regulated activities and the success of
the Canadian lobby encouraged Brazil to get tougher in negotiations with the IASB to
allow the use of the equity method in separate financial statements.
“No carve outs (in IFRS adoption), no restrictions, but you can see that the
comment letters from [the] CPC to [the] IASB are getting tougher and tougher.
[The] CPC has [concerns with) this equity thing, you can see they are raising their
tone” (IFRS Foundation Staff from Brazil, interviewed 8th September 2013).
One of the gaps between Brazilian Corporate Law and IFRS is the use of the equity
method to measure investments in subsidiaries. Under IFRS, separate financial statements
only use the fair value or the cost methods to measure investments in subsidiaries while
Brazilian Corporate Law only allows the equity method. After the adoption of IFRS, the
CPC lobbied IASB to bring back the equity method as an option in IAS 27 Separate
Financial Statements. After two years of lobbying, the IASB finally included its
amendment in their agenda in 2012 and it was approved on 12th August 2014. The CPC
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chose to lobby the IASB to amend the standard than initiate the amendment of the
Corporate Law.
Upon the adoption of IFRS, Brazil improved its position in the international arena. It
became an active member of GLASS (Group of Latin American Accounting Standard-
setters) established in 2011 and gained more representation in the IFRS-making arena. For
example, Amaro Gomez was appointed as an IASB member in July 2009 and Carl
Douglas as an IFRIC member in 2014. They are the only representatives from South
America on the IASB and IFRIC.
6.4. Discussion: A strong legal mandate has encouraged adoption
Before the adoption, Philippines and Brazil went through the harmonisation process.
In the harmonisation process, countries assessed each standard individually, and made
necessary adjustments to the standard based on the specific needs of stakeholders. In the
harmonisation period, countries still retained their local unique standards which were
mostly based on US GAAP. The first IFRS adopted in the Philippines in 1996 during the
harmonisation period was a standard on employee benefits. Each country assessed which
standard they needed the most, and investigated whether there was an IFRS based standard
that was relevant for their need. If IFRS did not regulate such a transaction, then they
looked to other GAAPs, (arguably the most sophisticated GAAP available in the 1990s, it
was US GAAP). As a member of the FRSC in the Philippines explained:
“The framework (IFRS Framework) provides that if there is no standard in the IAS
that is applicable and there is a need to adopt this particular accounting
treatment, you can refer to other acceptable standards, for example US GAAP and
other standards that will be applicable, for example business combinations under
common entities. We adopted the US standard on that, since we don’t have it until
now under the IFRS. They (companies) just have to refer to particular acceptable
standard, which was the U.S. GAAP” (Member of FRSC from the Philippines
SEC, Interview 14th February 2014).
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The harmonisation with IAS was a conspicuous trend in the 1990s for countries who
decided to adopt IFRS later in the next decade. Australia, for example, has a similar
timeline with the Philippines. Australia harmonised its standard with IAS on a standard by
standard basis in 1996 before fully adopting IFRS in 2005 (IFAD, 2002). Indonesia which
was also used as a sample in an International Forum on Accountancy Development
(IFAD) study started their harmonisation with the IAS in 1994. Further details on
Indonesia’s story can be found in the next chapter of this thesis. The IFAD 2002 survey of
54 countries revealed that 22% of these countries harmonised their standards with IFRS on
a standard-by-standard basis in the early 2000s (IFAD, 2002).
The standard-setters in both Brazil and the Philippines are not strong institutions like
the Japanese ASBJ or the US FASB which have dozens of full time technical staff. Both
the Philippines and Brazil, compared to other sampled countries in this study have the
least resourced accounting standard-setters. The accounting standards councils in both
countries comprise of representatives of various stakeholders such as auditors,
accountants' associations, securities exchange commissions, financial analysts'
associations and others relevant stakeholders. The members of the council work
voluntarily without the support of adequate technical staff. Brazil’s CPC and the
Philippine’s FRSC were supported only by one part-time staff. In the Philippines the
technical staff of the council is on secondment from a 'Big Four' firm and still holds her
position as a partner of the firm, so she can only work part time for the council.
The World Bank highlighted a lack of dedicated resources for the ASC Philippines.
The council received miniscule funding support from the PICPA, covering only meals
during meetings and other incidentals. The ASC members served on a voluntarily basis
without any remuneration. From the six sampled countries in this study, the FRSC is the
least resourced standard-setter. With a minimal budget and no dedicated technical staff,
the standard-setter in the Philippines does not have a strong presence in the country or in
the regional standard-setting arena.
“It’s a lunch meeting usually from 12 am to 2 pm. We have quick lunch than have
meeting. Every month the council meets and then I present the new issues for the
month. They deliberate if there are any proposal that could have significant impact
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or if the changes are so significantly [different] from the current practice. So
mostly it gets approved immediately except for IFRIC 15.” (FRSC secretariat staff
Interview 12th February 2013).
IFRS which has been represented as an internationally endorsed set of standards in
Brazil and the Philippines, arguably has served as a catalyst for accounting reforms. IFRS,
which has been claimed by the IASB as a principles-based and high quality accounting
standard has improved the technical legitimacy of the financial reports produced by firms
in countries with weak standard-setting arrangements, such as Brazil and the Philippines.
By adopting IFRS both countries have benefited from bringing their accounting rules to
the international level with minimum effort.
Nevertheless, most of respondents in both countries agreed that there was almost no
resistance from the stakeholders towards the IFRS adoption process. The law served as a
fait accompli for all the doubtful stakeholders and made the transition less contested. The
Philippines Accounting Act of 2004 stipulated that one specific responsibility of the BOA
is to promulgate accounting and auditing standards, and shall include the international
accounting and auditing standards (Article 2; Section 9). The Brazilian Corporation Act
No 11638/2007 also stipulated that the accounting rules by the CVM should be prepared
in accordance with international accounting standards adopted by the main securities
market. The Brazilian Corporation Act was discussed in the congress for seven years
before it was ratified as Bill No 3741. In the Philippines the idea of revising the
Accountancy Act of 1975 was discussed for many years, but the revision process started
after the World Bank ROSC report recommended it in 2001.
With this strong legal mandate from parliament, the decision to adopt IFRS attracted
little resistance from stakeholders according to respondents. Brazil and the Philippines,
despite their strong connection to US GAAP before the adoption of IFRS, made the
decision to adopt IFRS in a relatively short period without significant debate between
IFRS supporters and US GAAP supporters. In both countries, the degree of adoption was
also ambitious, as IFRS became mandatory for all companies both listed and non-listed,
consolidated and individual financial reporting.
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In parallel with the adoption of IFRS, the institutional arrangements of the standard-
setter in the country also changed. The new law in Brazil created the new standard-setter,
CPC in February 2006 (CPC, 2007). For the first time in history the country had a
legitimate accounting standards council. The Philippines’s ASC was transformed into the
new FRSC with clearer selection criteria and a maximum period for a member to serve in
the council. Upon the decision to adopt IFRS, Brazil also improved their cooperation with
IASB by signing the MoU and seems to have better representation in the IFRS Foundation
bodies with Brazilian sitting as one of the members of the trustee of IFRS foundation,
IASB and the interpretation committee.
The improved representativeness in the international arena after the IFRS adoption
was also expressed by one of the respondent from Brazil:
“No point of return now. It is good for the country, Brazil is a full member of IFRS
countries club now [proud tone]. In 2011 I went to IFRS conference in Zurich. We
just adopted IFRS in our consolidated and individual financial report bot listed
and non-listed very massively. Since then we are IFRS princess [in attracting the
attention of the conference’s participants] […] to have representative as IASB
member also help Brazil (for example) to be aware of the IFRS standard
development” (Interview with financial report preparer of Brazilian companies,
13th July 2014).
Pressure from international organisations such as IOSCO and the World Bank for the
Philippines, or the World Economic Forum for Brazil, was pivotal in encouraging the
decision-maker to adopt IFRS. The key player in the IFRS decision-making process in
Brazil was the central bank when it started to mandate IFRS for all financial institutions
before the enactment of the law. In contrast, the biggest accounting firm in the Philippines,
SGV, played a significant role through the network of ‘SGV’s alumni’ sitting in various
key positions such as chief accountant of the Philippines SEC and the chairman of
standard-setters.
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6.5 Conclusion
This chapter discussed the ambitious IFRS adoption process in two countries where
the decisions were supported by strong legal mandates and undertaken by the newly
established standard-setter. IFRS adoptions in these two countries were relatively fast and
without significant resistance from the stakeholders. A strong legal mandate is a big factor
in rendering the IFRS adoption process efficient and unchallenged. The law which
stipulates IFRS adoption has provided support for the accounting standard-setters to carry
on their duties in adopting IFRS. The enactment of the law also provided a clear cut in
disrupting the use of old standard and providing a firm target date for IFRS
implementation.
The next chapter will discuss the case studies of Indonesia and Canada where the
decisions to adopt IFRS were not supported by strong legal mandates. The two countries
also share similar institutional arrangements such as the accounting standard-setters being
funded by the accounting profession and having strong technical legitimacy. Both
countries had an era of ‘hybrid’ accounting standards which were a mixture of the IFRS
and US GAAP before deciding to adopt IFRS fully almost simultaneously, in 2006 for
Canada and 2008 for Indonesia. Without a strong legal mandate, the accounting standard-
setters acted as the major institutional facilitators in gaining support and resources for
IFRS adoption in their respective countries.
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Chapter 7. Lobbying Mechanisms in IFRS Adoption: The Case of
Canada and Indonesia
7.1 Introduction
Chapter six has discussed the IFRS adoption process in Brazil and the Philippines,
demonstrating that the use of the legal mechanisms can lead to an expeditious and less
contested process of IFRS adoption. In contrast, Indonesia and Canada pursued the
adopting IFRS without the support of a strong legal mandate, an approach that resulted in
more challenges in persuading stakeholders to accept IFRS. Indonesia revised its IFRS
target year several times and Canada took several rounds of public consultations over two
years and a transition period of five years before finally adopting IFRS in 2011.
Canada and Indonesia have many similarities in the IFRS adoption process. Firstly, the
standard-setters in both countries were established and funded by the professional
accounting associations. Secondly, both countries had already begun harmonising their
standards with the IASC’s IAS and US GAAP in the 1990s. In 1998 Canada decided to
harmonise its standards with IAS and eliminate differences with US GAAP at the same
time (TFOSS, 1998). In 1994 Indonesia adopted the IASC’s IAS but US GAAP remained
an important reference in its accounting standards development. The decision to adopt
IFRS fully for Canada and Indonesia, made in 2006 and 2008 respectively were a highly
significant and analysing such decision is the focus of this chapter.
Indonesia and Canada encountered different degrees of pressure when they decided to
adopt IFRS and abandon US GAAP. Being more dependent on the US economy and US
GAAP, Canadian stakeholders arguably had a more difficult choice to make when they
decided to adopt IFRS. With 336 Canadian companies listed in the US (2012 US SEC
data), Canada has more companies listed in the US than any country in the world. Before
switching to IFRS, US GAAP was a much more popular standard in Canada than in
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Indonesia which may explain why there were strong objections to the decision to prohibit
US GAAP after IFRS adoption.
In general terms, it appears that that IFRS was adopted in the Canada and Indonesia
not primarily because it was of a better quality than US GAAP. Some respondents argued
that while US GAAP was a more comprehensive standard than IFRS, IFRS was more
attractive as it was perceived to be an international standard – with US GAAP being seen
as a ‘national’ standard. Recommendations from international bodies such as the G20 and
IFAC to adopt IFRS were significant for Indonesia, while Canada decided to adopt IFRS
to maintain its influence in the IFRS-making arena.
This chapter will discuss both the history of IFRS adoption in Canada, and the IFRS
convergence process in Indonesia, highlighting the lessons learned and the key processual
differences to the cases of Brazil and the Philippines. The word ‘convergence’ is used for
Indonesia in this chapter instead of ‘adoption’, as Indonesia made use of the strategy of
converting its local standards to IFRS instead of adopting them in full. Its accounting
standard-setter (DSAK) refused to refer to the process as IFRS adoption and continues to
retain a few non-IFRS local standards.
7.2 IFRS adoption in Canada
The geographical position of Canada has made the country highly dependent on the
US economy. Although Canada’s trade with non-US countries has been increasing, the US
remains the primary trading partner for Canada, with 80% of Canadian exports in 2009
going to the US (Statistics Canada, 2011). Canadian companies have always dominated
the list of foreign companies registered on the US SEC. As of 31st December 2012, 336
Canadian companies were registered in the US SEC (SEC, 2012), which has made US
SEC rules and US GAAP relevant to most Canadian companies.
US GAAP was widely used in Canada before the decision in 2006 to adopt IFRS.
Since 1991, the US SEC and Canadian Securities Association (CSA) adopted the
Multijurisdictional Disclosure System (MJDS) which made Canadian GAAP and US
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GAAP acceptable in both jurisdictions38 for qualifying companies. This implies that the
CSA accepted US GAAP for domestic reporting and US regulators accepted Canadian
GAAP for Foreign Private Issuers (FPI) without a reconciliation to US GAAP.
Initially, the Canadian environment produced generally accepted accounting practices
based on English traditions. The origins of the Canadian accounting profession are
historically related to the UK (Gaa, 2007). However, as the US economy began to
dominate the Canadian economy in the 1920s, US accounting standards started to
influence the development of Canadian accounting standards. American textbooks began
to be more influential than British texts while the rapid increase of American investment
in Canadian business also drove the usage of US accounting standards ( Zeff 1971 as cited
in Gaa, 2007). A similar pattern was evident in Indonesia where the influence of US
accounting practices replaced the Dutch influence by the use of accounting textbooks and
the increase in US investments (Yunus, 1992).
Since 1946, the Canadian Institute of Chartered Accountants (CICA) began to
establish itself as a key actor in the development of Canadian accounting standards
(Baylin et al., 1996) with accounting and auditing standards in Canada being set
respectively by three standard-setting boards: the Accounting Standards Board, (AcSB);
the Auditing and Assurance Standards Board, (AASB); and the Public Sector Accounting
Standards Board (PSAB). All three are funded by the CICA. In 2014, the CICA merged
with two other professional bodies in Canada and re-established itself as the CPA Canada
(Chartered Professional Accountants Canada).
7.2.1 The harmonisation period: 1998-2004
In 1998 Canada started to harmonise its accounting standards with IAS with the
issuance of Task Force on Standard Setting (TFOSS) Report providing a new fundamental
platform for modern Canadian standard-setting. The report, issued by CICA,
acknowledged the need for a global accounting standard (p.2) and highlighted the
agreement between the IASC and IOSCO in 1995. In the agreement IASC agreed to
38 Source: SEC Release No.33-6902 (21st June 1991)
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complete a work plan encompassing a core set of standards covering the main areas of
financial reporting while IOSCO, in turn, agreed that successful completion of this work
plan will pave the way for it to review and, if found acceptable, endorse IASC standards
for cross-border securities registration. However at that time in 1998, IFRS was not as
developed as it is today and US GAAP was a prominent accounting standard globally. At
that time it was not very clear if one set of global accounting standards would eventually
emanate from the IASC, as being argued in the TFOSS report:
From a Canadian business perspective, we do not believe the IASC/IOSCO
agreement will result in the ultimate goal of internationally-accepted standards
unless it has the complete accord of the US Securities and Exchange Commission
(SEC). Failure of the agreement would, in the eyes of some, make the US Financial
Accounting Standards Board (FASB) the de facto world standard-setter in
accounting. (TFOSS report, 1998, p. 2).
The CICA accordingly decided to pursue a balancing act between the twin objectives
to harmonise with US GAAP while increasing its role in the international arena:
Under this option, the CICA would accelerate its harmonisation programme with
FASB standards and increase its involvement with the IASC and other
international groups, with the objective of reaffirming Canada’s significant role in
establishing international accounting standards (TFOSS report, 1998, p.4).
This resulted in the AcSB issuing accounting standards in compliance with US GAAP
even tough US GAAP was not seen as superior. An example of this was the issuance of
the Canadian accounting standard (Sec 3870) in 2001 for stock-based compensation which
matched the controversial US GAAP SFAS 123 (see Gaa, 2007 pg.88). Although the
AcSB made it very clear in the TFOSS report that its intention was to harmonise and not
to adopt US GAAP outright, but there was a common understanding among stakeholders
that Canada was in the process of adopting US GAAP. As Paul Cherry, the former chair of
the AcSB from 2001-2009 observed:
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“Because there is such a strong connection between the Canadian economy and
the US economy, Canada is the largest foreign SEC registrant, Increasingly the
Canadian board senses that harmonisation with US GAAP was starting to more of
adopting US GAAP [...]. In 2004 we said, if we just project out in the next 15
years, unless we do something differently, Canada will have de facto really
adopted US GAAP.” (Paul Cherry, Interview 10th July 2014).
Due to the past influence of the British accounting profession, Canadian accounting
standards were traditionally more principles based than US accounting standards. (Gaa,
2007; Webster and Thornton, 2005; Milburn and Skinner, 2000). An example of how
Canadian standards were more principles-based came from the CICA accounting
handbook which was less prescriptive than its US counterparts (Webster and Thornton,
2005). However the continous pursuit of harmonisation with US GAAP and IFRS resulted
in the Canadian GAAP becoming more rule-based than IFRS, but more principle-based
than US GAAP.
In early 2000, AcSB started to think about whether developing its own unique set of
standards was really that beneficial, given that the Canadian capital market constitutes
only a small fraction of the total world capital market. The market capitalisation of
Canadian issuers only represented 3% of the total world market capitalisation (Nicholls,
2006) and most of listed companies were small companies. There was a clear risk that
Canadian GAAP would never gain recognition as international GAAP. Thus in 2004 the
board sought feedback from stakeholders on a clear strategy for the future of Canadian
accounting standard-setting.
7.2.2 The decision-making period: 2004-2006
The decision to adopt IFRS in Canada was deliberated for about two years between the
standard-setter and the stakeholders. The role of the AcSB in Canada as the initiator of the
IFRS switch was confirmed by the capital market regulator.
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“It was not the securities regulators signalling or saying let’s make the switch to
IFRS. Certainly securities regulators were very aware of IFRS for that time
period. They monitored the evolution of the IFRS or the IAS at the time as they
were improving. So by the time the Canadian board get a consultation and made a
decision to move in this direction, we were comfortable with that because we are
comfortable with the set of standards that has been evolving internationally and
how they are becoming a more comprehensive set of standards. So by the time of
decision, we were comfortable with the switch.” (Senior Staff of the Ontario
Securities Commission, interview 16th July 2014).
The formal decision-making process to adopt IFRS by the AcSB was started in May
2004 by the issuance of a discussion paper “Accounting Standards in Canada: Future
Directions”, followed by a series of public consultations between 2004-2006. However
prior to that, since 1999, Certified General Accountants of Canada (CGA) has published a
position paper “The Case for International Accounting Standards in Canada” which
strongly supported the adoption of IFRS and the withdrawal from harmonising with US
GAAP. The CGA advised that adopting FASB standards would be a flawed choice for
Canada even though the US had been its major trading partner and that there were many
parties supporting the adoption of US GAAP in Canada (Richardson and Hutchinson,
1999).
The CGA report claimed that US GAAP was a more sophisticated standard than the
IASC’s IAS, but argued that it would not be prudent for Canada to adopt US GAAP
because of the ‘closed’ nature of the FASB’s standard-setting process which was designed
to accommodate US interests only. In contrast, the IASC’s standard-setting process has
seen to be more open to political representation and provided opportunities for the AcSB
to elevate its role and influence at an international level.
According to Paul Cherry, the AcSB had started in 2002 to discuss with various
stakeholders to issue the 2004 discussion paper. He saw the discussion paper as a vital
way of getting input concerning the future strategy of the AcSB:
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“The purpose of that invitation to comment was to ask three basic questions. First
of all do you agree that Canada needs a system of reporting that has global
recognition and global credibility in the major capital markets? Do you agree that
Canadian GAAP does not meet that standard, does not have that level of
recognition? If so, only two choices that Canadian board could see were [either]
US GAAP or IFRS. And that was the purpose of that invitation to comment. We
used that as a device to form the national debate around those three questions”.
(Paul Cherry, Interview 10th July).
The board offered four possible scenarios for the future development of Canadian
accounting standards (CICA, 2004):
1. maintain its own standard-setting capability;
2. maintain its own GAAP or adopt either US GAAP or IFRS;
3. maintain the current strategy of working to support the international
convergence of accounting standards while harmonising with US GAAP;
and
4. consider the possibility of modifying current GAAP requirements to
provide better information to the users of financial statements in terms of
various types of entities through, for example, a wider application of
differential reporting.
The response from stakeholders to the 2004 documents was a concensus that Canada
did not need to develop its own unique accounting standards, especially given the small
size of its capital market. The next question which was more challenging to answer was
which international standard should they adopt, US GAAP or IFRS. At that time Canadian
stakeholders were more familiar with US GAAP (as it was widely used by SEC registered
Canadian companies and Canadian standards had been harmonising to US GAAP for
some years). However one respondent commented, there was significant discontent among
stakeholders regarding the increasingly detailed rule-based nature of Canadian standards.
“The more we have adopted the individual US standards, the more people in the
community at large start to get the familiarity with what their standards were like.
And there was a lot of discontent with what they were seeing. It was an interesting
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phenomenon. The abstract idea of adopting US GAAP may have sounded
appealing to some people, but when they got to the specifics of actually having to
apply one of the standards as we were importing them, they were less and less
happy.” (Member of the AcSB, interview 20th September 2013).
Public roundtables and private meetings were held across Canada between July
and October 2004. The AcSB conducted 10 roundtable discussions with 106 participants
and received 64 comment letters from various organisations. The AcSB published a
summary of comments on October 28, 2004, and then presented its findings and
recommendations to the Accounting Standards Oversight Council (AcSOC) in February
2005.
The nature of the public consultation according to Paul Cherry was not to compare
whether IFRS or US GAAP was better on a standard by standard basis, but more to
determine which strategic decision of which standard would be most beneficial for Canada
in the future.
“Clearly we thought they were both high quality. With respect to IFRS, I think we
were saying based on the work programme, the changes IASB had made [to the
standards] in recent years and projecting forward that by the time the
implementation would come we thought IFRS would be the same quality with US
GAAP. But we constantly told people don’t come here arguing that that standard
is better than that standard, it was strategic. [...] we didn’t want people arguing on
specific technical issues. “ (Paul Cherry, interview 10th July 2014).
However, as Canadian stakeholders were far more familiar with US GAAP, arguably it
was difficult for the stakeholders involved in the debate to compare IFRS and US GAAP.
Thus another important role of the AcSB in that period was to educate stakeholders about
IFRS to assist them in making an informed decision.
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“It took some education. The Canadian board developed all sorts of material39 ,
more technical in nature. We made high level comparisons topic by topic. And say
here is how the current Canadian GAAP compares to IFRS, and we did more
detailed version. That is a fair comment that IFRS and the old IAS were not used
per se in Canada. It took a while to explain to people what our position was
[Canadian GAAP vs IFRS].” (Paul Cherry, interview 10th July 2014).
US GAAP supporters pointed out the lack of industrial guidelines within IFRS for key
Canadian industries, such as oil and gas. From a summary of discussions compiled by the
AcSB in 2004, there were stakeholders who were in favour of adopting US GAAP entirely.
Such US GAAP advocates argued that it was a set of predominantly global accounting
standards. Table 11 compiled the list of arguments for and against US GAAP by Canadian
stakeholders during July-October 2004.
Arguments for US GAAP
Arguments Against US GAAP
There should be harmonisation, but there
should also be a national structure to
highlight the differences. The AcSB should
continue to work with the US to ensure
Canadian circumstances are taken into
consideration.
US literature is voluminous and extremely
complex. There is a lack of familiarity with
US GAAP. Canadian GAAP should
therefore be preserved.
Full US GAAP convergence should be
supported. US GAAP is not perfect, but is
certainly predominant in global accounting
standards; therefore, Canada should move to
US GAAP as soon as possible in order to
eliminate unnecessary work involved in
reconciling Canadian GAAP information to
the US GAAP equivalent. Decisions made
today often take practitioners to a US
solution — to the extent an issue is not
addressed in detail under Canadian GAAP,
there are many who refer to US GAAP to
obtain further insight. Markets dictate the
financial reporting, hence US GAAP should
We cannot adopt US GAAP without also
adopting some of the US tax regime,
judicial processes, etc. Many Canadian
companies prefer not to get involved with
the US complexity. Not all Canadian
companies aspire to participate in
international capital markets (e.g., income
trusts).
39 The document produced by the AcSB in 2007 containing the implementation plan for IFRS adoption
was accompanied by an appendix containing a high level comparison table between IFRS and Canadian
GAAP. More educational materials were published by the AcSB after 2008 when Canada confirmed 2011 as
the effective date for IFRS adoption.
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be adopted in Canada. The influence of the
US should not be ignored, but at the same
time its influence should not dictate the
accounting standards that smaller entities are
required to apply. Large companies should
follow US GAAP in order to obtain access to
the markets they intend to participate in.
US financial reporting is perceived as
rules-based. There is a lack of support for
rules-based standards in Canada. The
risk is that the standards would be treated
like laws.
Adopting US GAAP is impossible due to
lack of expertise. There is a shortage of
expertise in small and medium-sized
companies, as well as larger companies,
to handle changes to US GAAP.
Independence concerns also compound the
issue, since a public practitioner cannot
prepare a client’s financial statements and
then review or audit them. There is a lack
of expertise at the senior level. US GAAP
should be avoided and the Canadian
standard-setting system should remain
autonomous.
Adopting US standards is “force-fitting”
foreign requirements into the Canadian
context, in particular with regards to small
private companies. US rules are not
relevant and should not be imported. The
cost and benefit of importing a standard
should always be assessed. Consideration
should also be given to the fact that small
companies vastly outnumber public
companies.
Table 11 Arguments for and against US GAAP in Canada
Source:http://www.frascanada.ca/accounting-standards-board/what-we-do/strategic-
plan/item69803.aspx, downloaded 4th April 2013.
The table above shows that arguments against US GAAP focused on the view that US
GAAP was an accounting standard for US business and that the US legal environment
may not fit well with Canada. Arguments against IFRS in Canada highlighted the
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independence of the IASB and the influence of European political lobby. Table 12 below
lists the arguments for and against IFRS in Canada during the decision period in 2004.
Arguments for IFRS Arguments against IFRS
Adopt IFRS, but without ignoring US
GAAP. Global harmonisation should be
encouraged. Canada should not “speak its
own language” or have separate
requirements as there are not enough
resources to support them
Canada should learn from experiences with
implementing IFRS in Europe and Australia
in 2005. The principles may sound fine in
theory, but practice is another matter. One
respondent expressed concern with IFRS, in
particular IFRS 41, Agriculture.
Canada should adopt IFRS. One standard is
essential if you want the free flow of capital
around the world and to avoid entities
having to apply multiple GAAPs, which is
confusing to the public. Industry-specific or
other issues should be brought to the IASB
and should be addressed in terms of their
specificity and uniqueness
We may be creating more confusion by
going to IFRS. Some of the standards
implemented have been driven by political
motives, in particular IAS 39, Financial
Instruments: Recognition and
Measurement. The problem with IAS 39 is
that banking in Europe is different. There
are other factors that can create
differences.
The US will not converge globally; hence
consider whether IFRS is the appropriate
option for convergence.
The AcSB should maintain its current
strategy except in instances where the
existing Canadian standard is “better” and
the new standard may provide lower quality
information. It should be considered that in
some instances, there are political
motivations underlying standards specific
to a country or region, which results in
entities being required to adopt a sub-
optimal standard.
Principles-based accounting applied with
professional judgment is preferable, hence
there is some concern about the movement
towards US GAAP.
Canada should follow Europe with the “IAS
2005” requirements, but for listed
companies only.
Table 12 Arguments for and against IFRS in Canada
Source: http://www.frascanada.ca/accounting-standards-board/what-we-do/strategic-
plan/item69803.aspx, downloaded 4th April 2013
In March 2005, the AcSB for the second time invited stakeholders to comment on its
Draft Strategic Plan. The second invitation particularly solicited comments on the overall
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suitability of the proposed strategies as, for example, if it would be appropriate to apply
different strategies to different categories of reporting entities. This time, the AcSB
received 66 letters of comment, as well as additional input from a large number of
individuals through public roundtable meetings and private discussions with key
stakeholder groups. Finally in January 2006, the AcSB ratified a new strategic plan that
significantly affected the way financial reporting was to be carried out in Canada. The
AcSB pursued separate strategies for three major categories of reporting entities: public
companies, private businesses and not-for-profit organisations (CICA, 2006).
For public companies, Canadian enterprises to adopt globally accepted, high
quality accounting standards by converging Canadian GAAP with International
Financial Reporting Standards (IFRSs) over a transitional period. At the end of that
period, a separate and distinct Canadian GAAP will cease to exist as a basis of
financial reporting for publicly accountable enterprises.
For private businesses, the AcSB began, as a matter of urgency, a
comprehensive examination of their financial reporting needs and then determine
and implement the most appropriate model to meet those needs.
For not-for-profit organisations, the AcSB continues to apply those elements
of GAAP for profit-oriented enterprises that are applicable to their
circumstances, and develop other standards dealing with special conditions for
the not-for-profit sector.
One of the major reasons for Canada to adopt IFRS and abandon US GAAP was to
maintain its influence in the IFRS-making arena. This argument was discussed in the
AcSB strategic plan “Accounting Standards in Canada: New Directions” (CICA,2006).
See excerpt below:
If Canada would have continued with a strategy of US GAAP harmonisation, it
would have continued to import more and more the detailed rules embedded in US
legacy standards. It would then be faced with the effects of replacing those
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standards with higher quality standards as global convergence continues. Canada
would also have lost some of the influence it might otherwise have in global
standard-setting, since that influence can come most readily through the IASB and
the adoption of IFRS. Accordingly, the AcSB has chosen a direction that avoids the
importation of US legacy standards and allows Canada to retain its position as a
contributor to improved global standards. (AcSB strategic plan, para. 42 p. 23).
Although the AcSB genuinely committed to adopt IFRS without carve outs, the
strategic plan also clearly stated that during the transition period, the AcSB would not
relinquish its power to modify or add to the requirements of IFRS under Canadian GAAP.
The AcSB also stated that it intended to continue to work with the IASB and the FASB to
bring Canadian views and experiences to the global standard-setting process.
7.2.3 The transition period: 2006-2008
The 2006 strategic and implementation plan stressed that the AcSB would monitor its
strategy and the state of readiness of Canadian investors and the business community. In
March 2007, Canada issued a detailed 57 page implementation plan (The “IFRS
Implementation Plan”) which required the AcSB to monitor the progress through the
transition period before the planned confirmation (in 2008) of 2011 as the formal adoption
year. In October 2007, the AcSB issued its preliminary report trying to answer the
following questions40 (p.2):
1. Is sufficient progress being made in Canada to establish the infrastructure for IFRS
implementation?
2. Were there any significant difficulties encountered in the initial adoption or
ongoing application of IFRS in the European Union (EU), Australia and other
countries that the AcSB should consider in determining the timing for
implementing the strategy for publicly accountable enterprises?
3. Does the IASB continue to develop high-quality standards that are accepted as
contributing to the improved functioning of global capital markets?
40 The report can be downloaded at : http://www.frascanada.ca/accounting-standards-board/what-we-
do/strategic-plan/item18491.pdf (accessed, 17th September 2015)
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In answering these three questions, the AcSB met with various stakeholders both
domestic and international. The October 2008 preliminary report detailed the extensive
consultations undertaken by the AcSB prior to the specification of the formal year of
adoption. Before making a decision in 2008, AcSB also paid close attention to the
development of other jurisdictions that had already adopted IFRS earlier.
“The Canadian board had made a promise to review decisions on the changeover
date. Because we knew that was a strategic change, five years was a long time.
What we did is to canvas the development around the world to see if there was
anything adverse that might suggest that we need to reconsider the strategy. We
looked at what happened in Europe and elsewhere in the world.” (Paul Cherry,
interview 10th July 2014).
Compared to Brazil, Philippines and Indonesia, the Canada adoption process was better
documented and communicated to the public through various reports. Canada seems to be
able to have more engagement with its stakeholders in public meetings. In the other three
countries many discussions took place behind closed doors where the minutes of the
meetings or reports are not available to the public. With comprehensive public
consultations over two years, members of the AcSB IFRS Advisory Committee (IAC)
agreed that Canada seems to be doing a better job in planning its transition than other
countries who have adopted IFRS41. Table 13 lists various consultation activities by AcSB
members to various stakeholders both domestic and international stakeholders.
Time Stakeholder Matter to discuss
July-October
2007
Two meetings with the CSA Chief
Accountant and OSFI Accounting
Policy Group. (CSA is Canadian
Securities Administration and
OSFI is The Office of the
Superintendent of Financial
Institutions
CSA to issue Concept Release in late 2007
to consult on matters within their
jurisdictions.
41 Summary of IAC public meeting on 22th October 2007. The short summary of the meeting is
available at: http://www.accountingeducation.com/index.cfm?page=newsdetails&id=145698, Accessed 22nd
January 2016.
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August 2007 OSFI Accounting Policy Insurance Companies seem to have little
preparation to date.
June 2007 User Advisory Council (UAC) UAC members expressed views that analyst
have not yet taken, and probably will not
take, actions to prepare for the changeovers
to IFRSs until closer date.
May 2007
Canadian Association of Petroleum
Producers (CAPP) and the Small
Explorers Associations of Canada
(SEPAC)
Concerns with the the current Canadian
GAAP standard for full cost accounting (the
accounting method used by most oil and gas
companies in Canada).
June 2007 Chief Accountants from the
Canadian Bankers Association
(CBA)
CBA expressed preference for the adoption
of IFRSs to follow a phase-in approach and
for new standards that would require a
second change shortly after the changeover
date to be delayed.
October
2007
Financial Executives Institutes’
Committees on Corporate
Reporting
Companies are only just beginning to focus
on the issues and because of a current focus
on new regulatory reporting controls, many
companies will not actively focus on that
until 2009
September
2007
Investor relations officers of major
companies
Generally aware of AcSB’s plan but had not
yet done much evaluation of its impact on
their activities.
2007 Rate-regulated Entities Rate-regulated operations have expressed
concerns about the application of IFRSs to
rate-regulated activities.
September
2007
Forest Product Association Not Specified
July 2007 Deputy President of the Association
of Chartered Certified Accountants
(ACCA) and the head of the
ACCA’s Canadian branch.
Not Specified
April 2007 Chair of the Australian Financial
Reporting Council (FRC)
Lessons Learned from the Australia
Experience in adopting IFRS. The FRC
Chair explained that Australia has reversed
its initial decision that AASB would
eliminate choices and modify disclosures in
order to protect Australia’s national interest.
April 2007 Staff of US SEC SEC focused on compliance with ‘IFRS as
promulgated by the IASB’ and not modified
version of IFRS. The meeting also
discussed the number of years for which
comparative figures are needed in the year
of transition to IFRSs, a question concern to
Canadian SEC registrants.
April 2007 Senior official visiting the UK
Financial Services Authority
To learn of the UK and European
experience in adopting IFRS.
Table 13. Public engagement activities by AcSB members/staff to stakeholders
during 2006-2008
Source: AcSB Various Reports.
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During this transition period, the US SEC made an important decision which served as
a major push in terms of Canada choosing to converge to IFRS. In November 2007, the
US SEC voted to eliminate the reconciliation requirement for foreign companies if IFRS
as issued by the IASB was used. This was a big surprise to the AcSB as they were not
expecting this decision when the consultation period had started in 2004. Canadian
companies comprised the majority of foreign registrants in the US stock market, thus the
US SEC’s decision to allow IFRS as an option provided great support for IFRS adoption
in Canada. As being revealed by Paul Cherry in the interview:
“I think one of the things that helped a great deal was the SEC announcement that
removed the US GAAP reconciliation requirement if companies were using IFRS
as issued by the IASB. That was a tremendous bonus for us. We didn’t expect that
when we started the consultation process back in 2004.” (Paul Cherry, Interview
10th July 2014).
As IFRS became an option for Canadian companies listed in the US, CSA started to
make a long term plan of prohibiting US GAAP for Canadian filing by these dual-listed
companies. US GAAP has been an option for Canadian filing since 200442. However, in
February 2008, CSA issued concept proposal 52-402 43 which asked if CSA should
prohibit the use of US GAAP for Canadian domestic companies by 2013:
CSA staff believe that, on balance, the factors discussed above support eliminating
our current provisions relating to the use of US GAAP by domestic issuers.
Specifically, CSA staff's tentative conclusion is that we should not allow a domestic
issuer to use US GAAP for a financial year beginning on or after January 1, 2009,
with the exception that a domestic issuer filing US GAAP financial statements in
Canada for its most recent financial year ending on or before December 31, 2008,
could continue doing so for five years (i.e. 2009 to 2013). (CSA Concept proposal
52-402 pg. 3.).
42 Document of National Instruments 52-107. 43 The concept paper is available from this link
http://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20080215_52-402_cp-fin-rpt.jsp, accessed 9th September
2014.
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CSA argued three main reasons for their proposal to prohibit US GAAP in Canada.
Firstly, by retaining US GAAP as an option, CSA believed that it might undermine the
goal of achieving “a single set of high-quality accounting standards”. Secondly, CSA
highlighted the cost and complexity of multiple standards as the other reason. CSA argued
that allowing multiple standards for preparing financial reports of domestic issuers would
reduce comparability of financial statements in the market and increase cost and
complexity for market participants. And lastly, CSA argued that the initial rationale of
allowing US GAAP (to reduce the burden for dual listed companies) had been largely
eliminated by SEC decision in 2007 to allow foreign private issuers to file financial
statements prepared using IFRS.
The CSA concept proposal received 41 comment letters from various stakeholders in
Canada including international accounting firms and Canadian companies44. While the
comment papers widely supported the adoption of IFRS in Canada most of the
stakeholders strongly disagreed with the CSA’s tentative decision, and arguing that US
GAAP should remain as an option for eligible Canadian companies. The majority of
comments or 68.3% (29) disagreed with the proposal to prohibit US GAAP and only 9.7%
(4) agreed. Retaining US GAAP as an option was supported by all Big Four firms and
dual-listed technology companies such as Research in Motion Limited (producers of the
Blackberry), at least until US domestic companies were required to adopt IFRS. With the
strong rejections from Canadian stakeholders, the CSA rescinded their tentative decision
to prohibit the future use of US GAAP and retain US GAAP as one of the options for
Canadian domestic issuers who were also US SEC registrants.
“It was a document to indicate that, yes, we are really in to IFRS and that
document, one of the decisions being made was to no longer allow US GAAP for
SEC companies (Canadian companies registered by the US SEC). And so that
consultation document was issued with that as a tentative decision and a lot a
concern was raised. A lot of backlash from the public companies using US GAAP.
44 All the comment letters are available at: http://www.osc.gov.on.ca/en/24314.htm, accessed 25th July
2013
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They wanted to continue to use US GAAP and so we eventually changed our
decision. We decided to continue to allow US GAAP but the initial decision was to
eliminate that permission.“ (Senior Staff of Ontario Securities Commission ,
Interview 16th July 2014).
The reason why some Canadian companies strongly supported US GAAP option was
because their competitors were mostly US companies, thus by reporting using US GAAP
they maintained the comparability of their financial reporting. Another argument was the
concern of the high transition costs from US GAAP to IFRS as discussed by one of
respondents below:
“[The] technology sector, for example, Blackberry and internet-based companies,
was quite interested in the US GAAP for a long time. Because a lot of Canadian
technology competitors are in the US, so there was a desire to use US GAAP.“
(Senior Staff of Ontario Securities Commission, Interview 16th July 2014).
Nevertheless in 2011, Canada went live with IFRS. Many respondents agreed that the
transition was smooth and the capital market did not panic at the beginning of the adoption
year. As the chairman of AcSB commented:
“The adoption of IFRS in Canada in large part, you know, it went very smoothly.
There was a five year period from beginning to end, we gave companies lots of
time. As I said we started moving certain standards to IFRS so that ultimately
when the transition to IFRS [came] it wouldn’t be a huge change. That was
different with the European adoption. I think Europe experienced much more
change going to IFRS than we did. So, I mean, I think it’s fair to say that in many
respects, when you saw the reports, the interim of filing starting to come out in
IFRS there was almost no commentary from the investment analysts that said:
“wow, this report is now under IFRS!” it was just business as usual. (Chairman of
AcSB, interview 24th September 2013).
In a summary, the chain of events of adoption of IFRS in Canada is listed in Table 14
below
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Dates Milestones
May 1998
CICA issued the Task Force on Standard Setting (TFOSS) final
report. A decision was made to harmonise Canadian standards with
US GAAP and IAS.
1999 CGA report published: The Case for International Accounting
Standards in Canada.
May 2004 AcSB began a process to develop a five-year strategic plan for the
period 2006-2011. AcSB issued ‘Invitation to Comment’ document:
Accounting Standards in Canada: Future Directions.
March 2005 AcSB issued ‘invitation to Comment’: Accounting Standards in
Canada: Future Directions - Draft Strategic Plan.
April 2005 US.SEC introduced a possible road map to eliminate the
reconciliation requirements for the foreign private issuers that use
IFRS.
2004-2005 Series of public consultations through public meetings and private
meetings held to seek input from domestic stakeholders and
international stakeholders. For example ten roundtable meetings were
held in 7 cities between July and October 2004.
January 2006 AcSB adopted its 2006-2011 Strategic Plan. In this Strategic Plan,
Canada decided to adopt IFRS by 2011 and the target year would be
reconfirmed in 2008.
March 2007 AcSB issued the IFRS Implementation Plan which required AcSB to
monitor progress over the next 24 months of its strategic plan.
October 2007 AcSB issued a progress review (Preliminary Report). The report
delineated the activities of the AcSB in consulting various
stakeholders, both domestic and international.
November 2007 US SEC voted to eliminate reconciliation from IFRS to US GAAP for
US Foreign Private Issuers who use IFRS as issued by IASB.
February 2008 AcSB issued a final review and confirmed that 2011 would be the
adoption year
February 2008 Canadian Securities Administrators issued a concept paper with
tentative decision to prohibit the use of US GAAP in Canada by 2013.
This paper received 41 comments which mostly rejected this proposal.
2008-2009 AcSB issued three omnibus exposure drafts on “Adopting IFRS in
Canada”
January 2010 IFRS was adopted. AcSB released Part I of the CICA Handbook
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which consists of IFRS
2011 IFRS became effective in Canada. Publicly accountable enterprises,
other than pension plans, are required to adopt IFRSs as Canadian
GAAP for interim and annual financial statements related to fiscal
years beginning on or after 1st January 2011.
Qualifying entities with rate-regulated activities, investment
companies and segregated accounts of life insurance enterprises can
defer their changeover to fiscal years beginning on or after 1st January
2014.
Table 14 Timeline of Canadian IFRS adoption and relevant events in the US
Source: AcSB various reports
7.2.4 The implementation period beyond 2011: The case of rate-regulated entities.
During the transition period, stakeholders in the adopting countries have escalated
their efforts in learning and applying IFRS. Usually during the transition period (before
the formal IFRS implementation year), countries made adjustments to provide transition
relief for certain industries or delayed the adoption of onerous IFRS. In a previous chapter,
Brazil for example decided to carve-out aspects of accounting policy from IAS 16
Property Plant and Equipment and IAS 38 Intangible Assets. Similar with Brazil, Rate
Regulated Entities (RRE) also became an issue during the implementation period in
Canada.
When Canada adopted IFRS in 2011, rate regulated entities were given a longer
transition period for IFRS adoption to mandatory adoption in 2012. In the meantime,
AcSB and utilities companies lobbied the IASB to re-open its rate-regulated activities
project which had been paused in September 2010 – and continued to do so, delaying the
adoption of IFRS for Canadian utilities companies.
Before the issuance of IFRS 14 Regulatory Deferral Accounts in 2014, there was no
specific standard for rate regulated activities. Many countries including Brazil and Canada
follow US GAAP (ASC 980 Regulated Operations) which allowed the recognition of
RRA and RRL. Around 2007-2008 the Big Four accounting firms deliberated if US
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GAAP for utilities was in compliance with IFRS and their consensus was that RRA and
RRL cannot be recognised based on IFRS. This has made billions of dollars of rate
regulated assets written off in Brazil when they adopted IFRS in 2010.
The AcSB and rate-regulated sectors in Canada were very active in ensuring their
concerns were heard by the IASB. For example, Canadian stakeholders contributed the
most comment letters to the “Request for Information on Rate Regulation” issued by the
IASB in May 2013 (12 comments letters from total 79 from 25 countries). Canada was
also represented better than other countries in the IFRS Consultative Group for IFRS 14
project with 3 seats; other countries mostly only have 1 seat. During the IASB public
roundtable on March 2012 for its ‘Agenda Consultation 2011’ in Toronto, the rate-
regulated sector was also well represented and much of the resulting discussion at the
meeting was on this topic
The IASB subsequently issued an interim standard (IFRS 14) which basically allowed
whatever the current accounting practice was until its Rate Regulated Activities project
was completed. Paul Cherry viewed that IFRS 14 as a big success of Canadian lobby.
“We considered it to be a success story in the sense that the Canadian board was
quite aggressive in making the IASB understand the importance of this issue […] I
didn’t say that US GAAP was the exact right answer, but was there for Rate
Regulated activities to give rise to Rate Regulated Assets and Rate Regulated
Liabilities? In certain aspects, I think the answer is yes. We were saying to the
IASB, look, this is becoming a hugely controversial issue. The accounting firms
were arguing with each other. This is too big a question to be put to the
Interpretations Committee. So the Canadian board strongly [advised] the IASB to
undertake the project which they agreed to do.” (Paul Cherry, Interview 10th July
2014).
However, the Canadian success may disappoint other countries which had adopted
IFRS earlier, such as Brazil. The role of Canada in influencing the IASB to issue the
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interim standard, IFRS 14, was conspicuous and had been highlighted by two Brazilian
respondents. As one Brazilian respondent, an account preparer in an infrastructure with
rate-regulated entities, commented the interview.
“They were written off [rate regulated assets] when Brazil adopted IFRS, billions
of Brazilian Reals. Now they issued IFRS 14, we were pissed off. A Canadian
lobby. Truly truly pissed off. […] Canadian adopters are in a more comfortable
position different from us four years ago.” (Interview with Brazilian accounting
controller, 13th July 2014).
In summary, the IFRS adoption process in Canada has been led by the accounting
standard-setter and through a series of public consultation and decision making due
process. With a strong influence of US GAAP over so many years and a weak legal
legitimacy of the decision, Canada was very concerned with the procedural legitimacy of
the decision. They realised that the decision to adopt IFRS would need to involve adequate
public consultation and follow the agreed due process to ensure that it would be accepted.
Compared to Indonesia, Brazil and the Philippines, Canada undertook a more rigorous
decision-making process in this regard.
The decision making process in Canada was also well documented in the AcSB
website which suggests a more inclusive process when compared to the developing
countries such as Indonesia and the Philippines. Respondents from standard-setters and
the regulator acknowledged the importance of a proper due process of decision-making
process.
“When the strategy was being developed, the board had an extensive conversation
with the securities commissions across the country, the major four (who are) really
active. So we met with them. They didn’t have strong views one way or another but
they said they would trust the process.[…] They were certainly interested in the
debate but they were much were more concerned that the process was appropriate.
The due process, public hearings, all of those things. That is true for our federal
government too when we tried to talk to the tax authority.” (Paul Cherry, interview
10th July 2014).
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“People want to be able to make decisions based on the evidence. The
commissions (CSA Commissioners) in Canada needed to make sure that decisions
were based on evidence from the public consultation. Without that we were
reluctant to make a decision to be honest […] If they the (AcSB) had not done a
public consultation and just made a decision, we, as regulators, would probably be
concerned because that is not our approach.” (Senior staff of the OSC, Interview
16th July 2014).
The decision to adopt IFRS, instead of US GAAP, was more to maintain the Canadian
influence in the international standard-setting arena than choosing a better standard from
the other. Adopting US GAAP has been perceived as unfavourable for Canadian interest
as the US FASB would only consider the interest of US stakeholders when developing US
GAAP. The case of IFRS 14 showed the Canadian strong influence in the IFRS-making
arena. Canada will be more likely to continue building up their influence in the
international arena, however, this power and influence is rarely found in other countries
with less technical resources such as Indonesia or Brazil. As it will be detailed in the next
session, Indonesia also faced turmoil in its decision-making process leading up to IFRS
adoption.
7.3 IFRS convergence in Indonesia
US influence is arguably less dominant in the Indonesian economy than in Canada, but
nevertheless since 1965 US and Japanese investment in Indonesia has significantly
increased. During the 1970s and 1980s, Indonesian accounting standards were not well
developed and US GAAP was the ubiquitous standard widely implemented in Indonesian
business entities.
“During those times most of my clients were foreign companies and they used
US GAAP at that time. But many Indonesian big companies like Astra, Salim
Group, they also asked to use US GAAP.” Utomo Josodirjo, interview 1st
December 2012.
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The first set of Indonesian accounting standards was formulated in 1973 and was an
adaptation from Accounting Research Study No.7, ‘Inventory of Generally Accepted
Accounting Principles for Business Enterprises’ published by the AICPA. The second
milestone was in 1984 when the accounting standard committee produced a handbook of
PAI 1984 (Indonesian Accounting Principles 1984) with the aim of adapting accounting
provisions to the recent rapid business development. US GAAP was the main reference to
develop PAI 1984.
An Indonesian standard-setter (DSAK) was established in 1998 replacing the informal
standard-setter council. Since its establishment DSAK has been funded by the IAI and IAI
National Council having the prerogative to appoint members of board. The IAI National
Council board also has a veto right, although it is very rarely exercised, to abrogate the
board’s decision.
7.3.1 The harmonisation period: 1994-2004
The 1984 handbook or PAI 1984 mainly derived from US GAAP was used without
any modification since early 1990s45. Starting in 1993, Indonesia adopted IAS in a Big
Bang approach, endorsing all of the IASC’s IAS at the same time. With the funding
support from the World Bank, the Indonesian Accounting Standard Board (DSAK) started
to translate and incorporate IAS into the local set of standards. The translation and
deliberation process which started in 1993 took about one year. At the 1994 IAI
quadrennial congress, IAI decided to adopt IAS and started to depart from US GAAP. The
decision was heavily contested by US supporters, as Hans Kartikahadi, the chairman of
the Indonesian Accounting Standards Council at that time revealed in his autobiography
(Kartikahadi et al., 2012):
“The council has worked very hard to adopt IAS. The standards were translated,
discussed at a public hearing, and had been approved by the plenary meeting of
the IAI national representative council. But then in the congress, the decision to
adopt IAS was contested, mostly by accountant academics who just returned from
45 According to Hans Kartikahadi during the interview on 3rd December 2012, there were no revisions to
PAI 1984 until 1993 due to lack of funding and resources for the accounting standard-setting activities.
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their postgraduate studies in the US. Realising that all the hard work may be
rejected, I then stood up and spoke very loudly and firmly to defend the council’s
decision and clarify the ill-advised arguments against IAS. […] The congress then
approved the IAS and that day was a historic day for the development of
Indonesian accounting standards.” (Kartikahadi, 2012 p. 62-63.).
The main debate between US GAAP supporters and IAS supporters, literally took
place in the IAI general meeting in 1994. Many respondents who attended the event
remember vividly the lively debate between academics who supported US GAAP and
those who supported IAS. One accountant recalled the debate in some detail :
“ I was one of the witnesses (to the debate). Our colleague who just came back
from the US brought the FASB flag to Indonesia. They were really expert, even
they remembered US GAAP word for word. They became very disappointed to
observe that the standard-setting committee [has] switched its direction to IAS.
They then protested, stood up and said “it is not acceptable to downgrade the level
of Indonesian accounting which has been built up sophisticatedly following US
GAAP; downgraded to IAS which are adopted by developing countries and
countries with the least sophistication in their accounting standards. Our
standards will detoriate and it will harm the accounting association”... I feel they
were a little bit rude at that time” (Former member of the Indonesian standard-
setting committee, Interview 12th September 2012).
According to the 2009-2014 DSAK Chairman, Rosita Uli Sinaga, who also attended
the 1994 congress, the main argument against IAS at that time was the suspicion that it
would not be suitable for the Indonesian culture and its business context. The opposing
group argued that IAI should make some research whether IAS was suitable for the
Indonesian business environment before deciding on adopting it.
“I still remember in 1994 that the capital market was booming and a lot of foreign
investors came to the Indonesian market. Hans Kartikahadi tried to argue that
argument by saying that such research will takes time and also the essence of
accounting standards is actually the ‘language’ of financial reporting. If most
investor who read financial reports are Indonesian, then such research is needed.
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However if most investors are foreign and we would like to attract more foreign
investors then we should use an international ‘language’, which is IAS” (Rosita
Uli Sinaga, Interview 26th October 2012).
One of the professors in accounting who was identified by three respondents as the
voice of the US GAAP supporters countered the need to adopt IAS, noting that he argued
as follows:
“Why don’t we wait until IAS becomes more complete and then begin the approach of
adopting IAS but keep referring to US GAAP when IAS does not cover the topic. If we
are going to switch to IAS, we should wait until IAS is complete, that was my
suggestion. But my proposal as well as others (Other US GAAP supporters – added)
were denied by the board and they carried on to adopt IAS in 1994” (US GAAP
supporter academic, interview 2nd January 2013).
The adoption of IAS in 1994 was part of a bigger capital market reform funded by the
World Bank. Indonesia received two grants from the World Bank to develop its
accounting standards both in 1988 and 1994. These two grants included technical
assistance in translating IAS from English to Indonesian language. The IAI with limited
funding and technical staff to support the accounting standards board was greatly assisted
by this technical assistance provided by the finance ministry. Most respondents agreed that
the World Bank grant was pivotal in supporting the work of the board in adopting IAS.
The chief accountant of the Indonesian SEC and also a member of DSAK, mentioned
that the World Bank grant was not only promoting accounting standards development but
also the development of capital market law which was enacted in 1995 and effective in
1996. The development of accounting standards was part of a larger project to improve the
capital market infrastructure and push the capital market to the next level.
“I know that we received World Bank grants to improve our capital market
infrastructure, including [assisting with] the adoption of IAS in 1994 and the
development of capital market law. We also received a lot of technical support
from World Bank consultants to develop capital market regulations after the law
was enacted. I remember I worked with two World Bank Consultants from the US
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SEC, and if you look into our capital market regulation the format is very similar
to US SEC regulation.” (Chief of Accountant of Indonesian SEC, interview 10th
January 2013).
The funding from the World Bank46 was confirmed by the IAI executive director and
also by Rosita Uli Sinaga. The World Bank’s grants enabled the IAI to benchmark its
standard-setting achievements against other accounting associations in developed
countries and also to develop professional certification (Indonesia CPA exam). Although
the grants were important for the IAI to fund the IAS adoption project, however, actors
involved in the process denied that the decision to adopt IAS was imposed by the World
Bank as a prerequisite to using the grant money.
“I believe that we received a grant from the World Bank via Ministry of Finance to
fund the 1994 IAS adoption. However I didn’t witness the Board having any
pressure from the World Bank to adopt IAS. It was the Board decision.” (Rosita
Uli Sinaga, the interview 26 October 2012).
“The council members of the IAI were very determined at that time to seek funding
for the adoption of IAS (in 1994), if we did not get the funding from the World
Bank, we would try something else.” (IAI Executive Director, Interview 21 May
2012).
The funding support from the World Bank may have been pivotal in supporting the
adoption of IAS, however from several interviews of board members of that period (1990-
1994) as well as the chairman of Indonesian SEC for that period; we could not find any
evidence that there was a pressure from the World Bank to adopt IAS. All of our
respondents from that period believed that the decision to adopt IAS was a collegial
decision by board members.
According to Hans Kartikahadi, the decision to adopt IAS was carefully and
exhaustedly discussed in DSAK meetings. One of the considerations to shift to IAS was
46 Indonesia received World Bank loan for USD 25 million in 1994 for a project named “Accountancy
Development II” to improve public sector accounting but one of KPI was the development of accounting
standard for private sector. The evaluation of the whole project (Report No: 22443) can be downloaded from
World Bank website: http://documents.worldbank.org/curated/en/2001/06/1614847/indonesia-second-
accountancy-development-project
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because US GAAP sometime did not fit in to Indonesian’s need because it was developed
for US country. One of the standards being scrutinized was accounting for foreign
exchange where the Board compared the standard under US GAAP and IAS, it observed
that IAS offered more principle-based standard and would be more relevant to be adopted
in Indonesia (Kartikahadi, 2010).
In Indonesia although US GAAP was perceived as a better standard than IAS
(especially during the mid 1990s) but US GAAP was not a better option as it was
considered to be a national GAAP, not an international set of standards. This was
confirmed by the former chairman of the Indonesian capital market regulator in the
excerpt below:
“Many listed companies in Indonesia were foreign affiliations so they also brought
their accounting culture to Indonesia. Mostly the accounting culture they used was
American culture. We often referred to US GAAP at that time [during the 1990s]
as IAS was not sophisticated at that time. US GAAP already has more detailed
rules and guidelines […] I personally liked US GAAP and I personally wanted US
GAAP to continue to be used but we are part of the international (society) while
America is a single country.” (Interview with former chairman of Indonesian SEC,
7th February 2013).
Upon the adoption of the claimed principles based IAS in 1994, the IAI still issued
several industry-specific rules based standards, to answer requests from the industry’s
regulators. Some of the examples are: accounting for telecommunication revenue (1995),
general mining (1995), forestry cultivation (1995), toll road operation (1997), real estate
industry (1994), cooperatives (1999), the banking industry (1999). US GAAP remained an
important reference to develop these industry-specific standards.
“In 1994 Indonesia took the “Big Bang” approach by adopting the whole set of
IAS. During the five years after that, we faced implementation challenges. 1994
was the first time we had a complete set of principles based accounting standards
so Indonesian companies were struggling to apply the standards, thus they asked
DSAK to make more detailed standards specific to the industry. That is the reason
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we had so many industry’s specific standards.” (Rosita Uli Sinaga, Interview 26th
October 2012).
In its development, financial accounting standards in Indonesia have been revised
several times in the period of 1994-2004, whether in the form of improvements or
additions of new standards. IAS/IFRS remains the major reference for the accounting
standards development, however Indonesia also considers US GAAP or Indonesian law as
references for some of accounting standards.
7.3.2 The decision-making period: 2004 – 2008
In contrast to the IAS adoption decision where respondents denied the existence of
strong international pressure in the decision-making process, all respondents agreed that
international pressure certainly influenced the decision to adopt IFRS in the period of
2004-2012. For most of respondents, IFRS adoption was inevitable as international bodies
such as IFAC and ROSC had recommended it. Two international pressures which jointly
influenced the decision for IFRS adoption, in chronological order were: compliance with
IFAC Statement of Membership Obligation (SMO) in 2004 and the World Bank ROSC
Assessment of Indonesia in 2005 (and also 2010). The recommendation of G20 to its
members to adopt IFRS was also influential to reaffirm Indonesia’s commitment to IFRS
during the transition period 2009-2012.
The decision to adopt IFRS fully and abandon US GAAP entirely was announced by
the IAI’s chairman, Ahmadi Hadibroto, at a national accounting convention in 2004. The
pressure of IFAC SMO was mentioned by many respondents as the main reason for the
IFRS adoption announcement by Hadibroto. In April 2004, the IFAC board issued its
SMO’s stipulating in SMO No 7 that its members should incorporate IFRS in their
national accounting requirements. The effective date of SMO No. 7 was December 2004.
“Basically it is very simple. IAI is a member of IFAC. IFAC issued SMOs [making
it] mandatory for all members to adopt IFRS. So to me, if you are a member of a
certain organisation, you have only two choices, follow whatever the requirements
are or you wait. That is the consequence if you are member of an organisation.
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Now, if we didn’t follow IFRS, we would have been excluded from the accounting
world. So definitely not a choice.” (Ahmadi Hadibroto, interview 20th September
2012).
However after the announcement, Hadibroto faced challenges in gaining support from
stakeholders (including DSAK itself, especially with respect to the implementation year)
Most DSAK board members at that time were very sceptical about achieving full IFRS
adoption by 2008. There was a subsequent series of negotiations between the IAI national
council and DSAK. In 2006 the target year was moved to 201047 but finally in 2007 the
IAI council, the advisory board and DSAK agreed to delay the IFRS adoption target to
2012.
“I was worried the board couldn’t finish the project because everything seemed to
be business as usual. No extra effort or specific strategy on how to achieve the
target.” (Former member of the Board of the Indonesian SEC, interview 10th
January 2013).
“Even when the target was moved for the second time to 2012, I still felt sceptical.
I believed that 2012 was still too soon. My estimation was that it should be reached
by 2015.” (Former member of the board, Big Four partner, interview 9th December
2012).
The failure to meet the IFRS adoption target several times raised World Bank concerns
over the ability of the IAI (and DSAK which is fully funded by the IAI) to bear its
responsibilities as the national accounting standard-setter.
…The convergence of Indonesian accounting standards to IFRS is too important to
be left to a private sector organisation like the IAI, which failed to meet the IFRS
convergence target a few times in the past… - World Bank 2010 ROSC Para 71
The executive director of IAI, in interview revealed some of the reasons, as to why
the IAI had failed to meet these targets. One of the claimed reasons was a lack of technical
resources and funding allocated to DSAK. She also mentioned the issue of effective
47 Two members of the Boards we interviewed remember that the target year moved twice.
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leadership of DSAK and a lack of international communication as additional impediments
of IFRS adoption, but above all she believed in 2004 that all stakeholders especially the
IAI were not ready for the change.
“If I can be honest, in 2004, the announcement of IFRS adoption at that time was a
little bit immature. But IAI’s chairman decided to announce it in that national
event in the hope of gaining support from the profession and also the government
to achieve that goal together. Besides the focus of the IAI at that time, honestly,
was not on IFRS adoption but more on the strengthening of its funding source of
because we just bought a new building.” (IAI Executive Director, interview, 21st
May 2012).
Many respondents during the interview acknowledged that the 2004 decision had not
been made with adequate consultation with other governing bodies in the institute. At that
time the chairman of the institute, Ahmadi Hadibroto, was a very strong figure and even
he in the interview also admitted that the 2004 announcement had been premature:
“I have to admit; in 2004 the announcement was a little bit premature. We didn’t
realise how difficult it was to adopt IFRS.“ (Ahmadi Hadibroto, interview 20th
September 2012).
7.3.2.1 The World Bank Influence
Beside IFAC SMO, Indonesia also received pressure from the World Bank ROSC’s
first review in 2005. Although the ROSC report was issued in 2005, the survey was sent
months before to be filled by relevant stakeholders. This is confirmed by two respondents,
Ahmadi Hadibroto and Hans Kartikahadi.
“I met a World Bank consultant after the Asian financial crisis [in early 2000], he
assessed the financial report of our listed companies and gave harsh comments
about the quality of our accounting standards which in his assessment did not
comply with international standards. I told him we have actually adopted IAS since
1994, but he said our adoption is not 100%, I replied back can you tell me which
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country complied with IAS 100%, and the World Bank consultant was in silence.”
(Hans Kartikahadi, former chairman of DSAK, Interview 3rd December 2012).
The World Bank’s assessment of Indonesian accounting standards influenced the then
chairman of the IAI, Ahmadi Hadibroto, to opt for full adoption to IFRS. After IAS had
been adopted in 1994, the subsequent revisions of IAS had been ignored by DSAK.
Instead, after 1994, DSAK had issued many industry specific rule-based standards which
sometimes referred to the US GAAP.
“I was asked by the World Bank consultant when we will adopt IFRS. It brought
pressure. Before the ROSC 2005, there was a study as well by the World Bank as
well to benchmark Indonesian accounting standards against IFRS. I remember the
result. They said that our standards in general were benchmarked to international
standards but it’s very confusing for them to assess because our numbering
standard system is different and also [because] the modifications we made. They
had reached their conclusion after reading our standards one by one. So when the
IFAC SMO was issued, I was thinking why don’t we adopt IFRS fully so it will be
easier for external analysts to review our standards.” (Ahmadi Hadibroto,
interview 3rd December 2012).
In December 2008, the IAI managed to mobilise the support it needed to be able to
make a bigger public statement entitled entitled ‘IFRS Convergence 2012’. This
announcement was made possible through to a series of lobbying attempts by Ahmadi and
Herwidayatmo (former chairman of Indonesian SEC) to various stakeholders groups. To
avoid another embarrassment of missing a target year and to be able to announce firmly
the target year of 2012, Ahmadi realised that the IAI needed to secure support from the
Indonesian SEC and also sought support from capital market institutions and the ministry
of finance.
Herwidayatmo was the chairman of Indonesian SEC 2000-2004 and became the World
Bank executive director for South East Asia in 2006. Upon Herwidayatmo return from
Washington, he was persuaded by Ahmadi to lead the Accounting Standards Advisory
Board (DKSAK) at the IAI. Herwidayatmo had a strong network inside the ministry of
finance and the capital market institutions and had been mentioned by other respondents
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as playing important role for securing the support from these institutions. Herwidayatmo
pushed Ahmadi to take a firm position on 2012.
“I am the one who pushed Ahmadi to announce 2012 as the target year for full
IFRS convergence. I remember when we had coffee at Le Meridien Hotel, I told
him we have to be confident. I shared my experience when I was the chairman of
Indonesian SEC and executed scriptless trading [and] so many securities
companies complained. [I said to Ahmadi] It is a tough decision that will provoke
controversies, but we just need to be firm.” (Herwidayatmo – Interview 1st
February 2013).
Ahmadi and Herwidayatmo met with the Minister of Finance, Sri Mulyani in 2007 to
ask for support. Both gentlemen also lobbied the capital market authority to support IFRS
convergence. They had meetings with the chairman of the Indonesian SEC and secured
funding support commitment from three capital market Self Regulatory Organisations
(SROs) for the 2008-2012 IFRS convergence project. The funding was pivotal in
supporting DSAK in reaching its goal. With that funding from SROs, the IAI was able to
hire more technical staffs to support DSAK and held more DSAK meetings, printed more
exposure draft books and hosted more public hearings and seminars.
Beside the finance ministry, the IAI also secured support from the central bank and the
education ministry. Thus in the grand launching of the IFRS convergence project at 23rd
December 2008, the event was well attended by government officials such as the
education minister, the chairman of Indonesian SEC and the deputy governor of the
central bank. The event was widely broadcasted in the media and a snowballing effect
took place immediately after the event making IFRS convergence as hot topics among
accountants in Indonesia. Many seminars, training sessions and other public discussions
were held beginning in early 2009.
The support from the central bank was crucial in the implementation of IAS 32 and
IAS 39 (standards on Financial Instruments) in 2010. With one of central bank deputy
governors sitting on DKSAK, and also one member of the DSAK were from the central
bank, the IAI had very strong support for IFRS convergence. Although the standards were
delayed by one year (they were supposed to have been effective on 1st January 2009),
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there could have been a further delay until 2011 without the strong support from the
central bank, given the strength of objections from the industry at the end of 2009.
7.3.3 The transition period: 2009 – 2011
IFRS convergence in Indonesia started to unravel in 2009 with many parties doubting
whether DSAK would be able to finish IFRS adoption on time. A delay in the
implementation of the financial instrument standards (IAS 32 and IAS 39) at the end of
2008 was also a big defeat for DSAK and the IAI. IAS 32 and 39 were supposed to be
effective on 1st January 2008, but the banking industry complained for lack of transition
year and high cost of adoption and urged the central bank and DSAK to delay the
implementation of these standards. Strong resistance from the banking industry to the
financial instruments standards also created a major impediment for full IFRS
convergence in Indonesia.
The change of DSAK leadership in July 2009 was essential in restoring public
confidence in the IFRS convergence process in Indonesia. Jusuf Wibisana, senior partner
of PWC was DSAK chairman for eight years since 2001 and succeeded by Rosita Uli
Sinaga in 2009. Her communication with IASB’s staff clarified that IFRS should be
adopted word by word with the similar effective date as IFRS or maximum 6 months
difference between the effective date stipulated by IASB and DSAK (especially for new
standards issued by IASB). Rosita was not comfortable with this term especially as she
thought that IASB had been moving faster than DSAK, and decided to redefine
Indonesian ‘IFRS Convergence’ with “Revising PSAK to reach material compliance with
IFRS as of 1st January 2009, which will be effective at year 2011/2012.”. With this new
definition, the IFRS application in Indonesia would have three year gap with the IFRS
applied in other jurisdictions which adopt IFRS fully such as the Philippines and
Australia.
The redefinition from IFRS adoption to the IFRS convergence was communicated
both nationally and internationally. Although communicating a new message was not
easy, redefinition was beneficial to calm nervous stakeholders (regulators, accountant
professions and users) who were thinking the whole transition to IFRS was very fast.
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Stakeholders were also nervous that DSAK would just adopt IFRS word by word without
proper deliberation if modifications may be necessary to adjust with local needs. DSAK
chairman in many public engagements firmly confirmed that this will not be the case for
Indonesia where DSAK reserve their rights to modify the standards whenever necessary.
Subsequently upon her appointment, Rosita Uli Sinaga established a detailed working
plan for each working group to finish all IFRS in two years. The style of board meetings
changed dramatically. The typical DSAK meetings under Jusuf Wibisana were relaxed,
unstructured, full of humour, and relatively short, only two to four hours twice a month48.
With Rosita Uli Sinaga as the meeting leader, the meetings were more formal, the agenda
was more structured and the decision-making were more efficient49. The meeting also took
longer hours as the board had the meetings over the weekend for two days. Her leadership
and progression were acknowledged by many respondents and in the ROSC report 2010
…Since 2009, DSAK, under IAI, made substantial progress in trying to accelerate the
convergence process, by dedicating full-time staff and allocating a workload to
working groups with clear targets. However, they lack resources and there is no
accountability if the target of full convergence by 2012 is not met. Hence it is
important to set up a Financial Reporting Council with that responsibility. In the
interim, the government should provide all possible assistance to IAI DSAK on
continuing towards full convergence. (World Bank 2010 ROSC Report on
Accounting and Auditing in Indonesia, para 71).
Due to such strong leadership at DSAK, IAI gained more attention from the IASB. In
2011 for the first time, the IAI hosted an IFRS international event, the IFRS Policy Forum
in Bali. The IASB also sent its director for international activities, Wayne Upton to meet
with DSAK and the preparers to discuss the impediments preventing or delaying IFRS
convergence. There were two discussions, one in May and another in October 2010.
Indonesia was also invited to become a member of the IASB working group for Emerging
Economies (EEG) which holds meetings twice a year. After 2009, despite being a country
which provided no funding to the IASB, Indonesia’s voice became more dominant in the
48 Interview with the former technical director of DSAK. 49 The leadership style differences were also highlighted by the members of DSAK which experienced
two term of membership.
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international arena than ever before. Table 15Error! Reference source not found. below
summarises the IFRS convergence process in Indonesia.
Time Decisions
1994 The adoption of IAS by Indonesian Accounting Standard Board (DSAK)
1994-2004 The development of other accounting standards
2004 The chairman of Indonesian Institute of Accountant announced the plan
for IFRS adoption by 2008
2006 Revising the target year of IFRS adoption to 2010
2008 Revising the target year of IFRS adoption to 2012
December
2008
Delaying the effective date of IAS 32 and 39 for one year, from 2009 to
2010, after a strong objections from the financial industry
July 2009 The chairman of DSAK changed the term adoption to ‘convergence’ and
clarified the target of 2012 convergence year as to adopt IFRS as of 2009.
Table 15. Timeline of Indonesia’s convergence process
The international pressure for IFRS convergence also came from the G20. At its
second summit in London April 2009, the G20 issued a leader’s statement with 29
recommendations to its country members. One of the recommendations to strengthen the
financial supervision and regulation was the adoption of IFRS.
To call on the accounting standard-setters to work urgently with supervisors and
regulators to improve standards on valuation and provisioning and achieve a
single set of high-quality global accounting standards. – G20 Leader’s statement
para 15
On 23-24th July 2009, IFAC held a G20 accountancy summit in London to compose
IFAC recommendation for the G20 September meeting. At this summit, the IAI Chairman
Ahmadi Hadibroto who was also the immediate past chairman of the AFA (ASEAN
Federation of Accountants) delivered a presentation. In his presentation before the IFAC
summit, he affirmed Indonesia’s commitment to fully adopt IFRS by 2012. Indonesia’s
involvement in the G20 also improved political support from the Indonesian government.
For example in 2010, the Ministry of State Owned Enterprise (SOE) sent a letter to all
SOE’s directors requiring all SOEs to use PSAK (IFRS-based standards) and prohibit
SOEs from applying SAK-ETAP (Standards for SMEs). This request from the Ministry of
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SOE has encouraged the SOE, especially the listed SOEs, to create their roadmaps in
adopting IFRS50.
The pressure from the G20 and the World Bank provided a strong argument for DSAK
to use in trying to convince doubtful parties regarding the suitability of IFRS for the
Indonesia business environment. “If the G20 and the World Bank have recommended
IFRS and Indonesian leaders are committed to it, it is not a question of ‘Why IFRS?’
anymore, but more a question of “how and when we will fully comply with IFRS’.“
Those were commonly heard statements from DSAK’s chairman and other DSAK
members when they gave public seminars regarding IFRS during 2009-201051.
The pressure of ROSC assessment become one of the factors of due process rush in
2009-2010. The assessment for the 2010 ROSC report started in August 2009 when the
IAI need to fill in a survey sent by the ROSC consultant with regard to the accounting
standards development. DSAK received a significant amount of pressure to finish some
standards so they could be included in the ROSC assessment. The ROSC assessment was
included in DSAK’s agenda across several meetings from November 2009 – October
2010.
In the draft ROSC Report dated 8th March 2010, it was mentioned that the World
Bank’s assessment of IFRS convergence in Indonesia was ‘slow’. DSAK took this report
seriously and discussed a response letter in its board meeting on 27th April 2010 (DSAK
minutes of the meeting, 2010). On 10th May, DSAK sent a letter to the Ministry of Finance
to object to some paragraphs for the ROSC failed to acknowledge the significant progress
in the last six months. It was not easy to convince the ROSC consultant that significant
progress had been made and needed to be acknowledged in the report. The lobbying
process continued through emails and meetings and resulted in a delay in the publication
of the ROSC 2010 until April 2011. As a result of strong lobbying from DSAK, the
ROSC final report was published with revisions more favourable to the IAI, as detailed in
the Table 16 belowError! Reference source not found.:
50 For example, the IFRS roadmap published by one of the biggest Indonesian SOE, PT. Telkom
Indonesia is available in: http://www.telkom.co.id/UHI/UHI2011/ID/0912_IFRS.html (accessed 21st
September 2015) 51 Observations and past experience of the researcher as well as comments from some interviewees.
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ROSC draft report as of 8th March
2010
ROSC final report as published on
the World Bank website
Indonesia’s programme of
converging PSAK with IFRS has been
very slow due to inadequate resources at
the disposal of the Financial Accounting
Standards Board. The progress of issuing
IFRS-based PSAK is quite slow mainly due
to the fact that the DSAK finds it difficult
to catch up with the growing number of
new and revised IFRS and interpretations
issued by the IASB…
Indonesia’s program of converging
PSAK with IFRS was slow in the past
due to inadequate resources at the
disposal of the Financial Accounting
Standards Board. However, a serious
effort was undertaken by the Financial
Accounting Standards Board to expedite the
convergence process in 2009. By March 31,
2010 the Board had significantly reduced
the gap between local standards (PSAK)
and IFRS by revising 15 standards and
revoking 15 non-IFRS based standards. The
progress of issuing IFRS-based PSAK is
quite slow mainly due to the fact that the
DSAK finds it difficult to catch up with the
growing number of new and revised IFRS
and interpretations issued by the IASB...
Table 16. Comparison between the ROSC draft and the ROSC final report of
Indonesia
Souce: DSAK document
By 1st January 2012, all IFRS as of 1st January 2009 has been effective except for
IFRS 1 First Time Adoption, IAS 41 Agriculture and IFRIC 15 Agreements for the
Constructions of Real Estate. Indonesia should have made formal decision in 2012 when
DSAK would fully adopt IFRS (closing the 3 year gap). However in March 2013,
Indonesian FSA made a public announcement that Indonesia was not in rush to fully adopt
current IFRS. Chairman of Indonesian FSA, Muliaman Hadad, in his speech in front of
IASB chairman made it very clear that only a stable IFRS will be adopted by Indonesia,
which indicates that DSAK will only translate and adopt IFRS that has been ratified by
IASB52. Any non-standard output from IASB such as discussion papers or exposure drafts
will not be circulated among Indonesia’s stakeholders
52 Muliaman Hadad keynote speech on seminar of “IFRS Dynamics 2013 and beyond: impact to
Indonesia” in Jakarta, 6th March 2013. In his speech, he also admitted that the IFRS implementation in Indonesia had many challenges as being highlighted by the media, for example :
http://bisnis.liputan6.com/read/528610/ojk-penerapan-standar-akuntansi-berbasis-IFRS-penuh-tantangan
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7.3.4 The implementation period beyond 2012: The case of accounting for land and
IAS 41
If accounting for rate regulated entities became an issue in Canada during the
implementation period, Indonesia had an issue related to accounting for land. Before the
adoption of IFRS, Indonesia had a specific accounting standard for land which was driven
by national land law. Indonesian GAAP basically stated that land was recognised as
property plant and equipment (PPE) and should not depreciated over its economic useful
life – it, in short, considered that land had an infinite life. During the IFRS convergence
period of 2008-2012, accounting standard for land was one of many non-IFRS standards
being withdrawn by DSAK. IFRS did not have a specific standard for land as the standard
for land would depend on the land law for each jurisdiction.
The Big Four accounting firms in Indonesia had different interpretations to Indonesian
law. Their view under IFRS according to accounting firms varied, some recognised the
land as PPE, others as finance lease, or even as operating lease. This had created different
practices among foreign subsidiaries in Indonesia, especially subsidiaries of European
companies, when they need to reconcile their financial statements from Indonesian GAAP
to IFRS for their parent companies.
Around the convergence period, the Indonesian board analysed the case for land under
IFRS. A focus group discussion was held among members of DSAK and the government
to interpret Indonesian land law with IFRS framework. The conclusion was that land
should be recognised as PPE and should not be depreciated. The board then issued an
exposure draft of interpretation No.25 to seek stakeholder’s comment. The board also
wrote a discussion paper and presented this at EEG meeting in India, on 19-20th December
2011.
On 13-14th March 2012, this issue was discussed at an IFRIC meeting where there was
disagreement with the Indonesian conclusion and a decision taken that according to IFRS,
land in Indonesia should be recognised as a finance lease. Unlike the Canadian standard-
setter, who seemed to be able to lobby the IASB successfully in its favour, Indonesia
lacked lobbying experience at an international level and achieved a negative result. In May
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2012, IFRIC was provided with more information by the DSAK, in the hope that they
would change their decision but IFRIC responded that this was a national jurisdictional
issue and could not be included in its meeting agenda.
Another issue in the implementation period was the adoption of IAS 41 Agriculture,
which also became an issue for Malaysia and India. Malaysia which was also targeting
2012 as its IFRS implementation year lobbied Indonesia to postpone the adoption of IAS
41 Agriculture. The use of fair value in measuring biological assets, according to
Malaysia, failed to consider long-lived biological bearer assets such as the palm
plantation. Malaysia as the number one palm oil producer in the world had a vested
interest to protect its industry. And because most Malaysian palm companies have
subsidiaries in Indonesia or plantations in Indonesian soil, it was also important for
Malaysia that Indonesia has the same effective date for the standard. If Indonesia decided
to adopt IAS 41 earlier than Malaysia, it would complicate the consolidated financial
reports of Malaysian parent companies.
Together Indonesia, Malaysia, India and other countries in the Asia-Oceania region
lobbied the IASB to revise IAS 41. After a series of lobbying efforts through the AOSSG
this issue was discussed by the IFRIC and the IASB in 2011. In June 2013 the IASB
issued an exposure draft allowing bearer biological assets to be measured at historical cost
and on 30th June 2014, the IASB published the ammendement of IAS 16 Property Plant
and Equipment to include bearer biological assets in the scope of IAS16. The example of
these two issues faced by Indonesia, compared to Canada showed that for countries
without a strong influence in the international arena, they need to lobby harder and
sometimes even join forces in their lobbying efforts where there are common issues facing
more than one jurisdiction.
7.4 Discussion
The case studies of the Canadian and Indonesian adoption processes demonstrate that
the decision to adopt IFRS without a strong legal and political mandate may result in a
longer and more challenging process. The decisions to adopt IFRS in Canada and
Indonesia were initiated by the accounting profession involving individuals with oversight
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over the national accounting standard-setter. Compared to the case of Philippines and
Brazil where the decisions were supported by strong legislation, the accounting standard-
setters in Canada and Indonesia needed a longer period to convince stakeholders that the
decisions to adopt IFRS would be good for the country.
The accounting standard-setters of both countries received more technical support
from their foundation compared to the Philippines and Brazil which enabled the boards to
carry out more detailed deliberations and ensure that all the steps required in the process
were carried out. The study documented some debate in Indonesia and Canada when they
had to make an important decision to switch from US GAAP to IFRS. In Indonesia the
switch (which received strong resistance from US GAAP supporters) took place between
1993 to 1994 while in Canada, the debate took place more recently, between 2004 and
2006.
The IFRS vs US GAAP quality debate in Canada and Indonesia emerged in two
different periods. The major shift from US GAAP to IFRS took place when Indonesia
adopted IAS for the first time in 1994 when IAS was arguably, not as good as IFRS at the
later stage when Canada adopted it in 2004. Nevertheless in two different periods, US
GAAP had been claimed as ‘local’ standard whereas IAS/IFRS was claimed as
‘international’.
In the previous case of Brazil and the Philippines, the decision to adopt IFRS had
strong legal and political support leaving national accounting standard-setters with fewer
burdens to convince doubtful stakeholders. However in the case of Canada and Indonesia,
the accounting standard-setters were the dominant actors to institutionalise IFRS.
Standard-setters in Canada and Indonesia were involved in extensive lobbying activities to
secure support from stakeholders. In Indonesia, the role of the chairman of the Indonesian
Institute of Accountants, Ahmadi Hadibroto, as the key actor was obvious and confirmed
by various respondents. In Canada, the decision-making process was more through
collegial activities of the board as an organisation. The accounting association (which
funded the standard-setter) instead of the government agency, introduced the idea of IFRS
adoption to the country, mobilising resources and actively getting involved in a series of
lobbying activities to ensure that the idea of IFRS was accepted.
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Apart from lobbying the domestic stakeholders, both countries also got involved in
international lobbying activities during the transition period. Canada’s lobbying activities
were more ‘international’ than Indonesia’s which had less international influence in the
IFRS-making arena. Both countries had challenges during the transition period of IFRS
adoption, but Canada seemed to have been able to influence the IASB to their favour
while Indonesia needed to form an alliance with Malaysia and India to amend IAS 41.
Indonesia and Canada are examples of active IFRS adopting countries, which did not just
adopt IFRS without reservations. The case of Indonesia and Canada show how national
regulatory field are interconnected with the regional or international field during the
decision making process and especially after IFRS was implemented.
The case studies of Canada and Indonesia also show more contested processes in
institutionalising IFRS to the national regulatory field. The IFRS supporter in Canada and
Indonesia were involved in the ‘creating’ institutional work by introducing the idea of
‘one global accounting standard’ to the field and at the same time ‘disrupted’ the idea of
developing their own unique accounting standards. For example in Canada, the small size
of its capital market had been used as an argument to undermine the idea of developing its
own unique accounting standards. During the decision making process, some arguments to
maintain US GAAP (or local standard which was derived from US GAAP) were also
observed for example by arguing that US GAAP was still a predominant accounting
standard (Canada) and a more sophisticated standard than IFRS (Indonesia).
Although the US GAAP supporters failed during the decision making period, but
during the transition period the US GAAP supporters were able to avert the decision to
prohibit US GAAP in Canada. During the transition period, Indonesia also redefined their
commitment to full IFRS adoption to IFRS convergence by reserving their rights to divert
from IFRS whenever necessary. DSAK exercised its right to take different position from
IFRIC in regard with the accounting for land. These developments during the transition
period, which is the period between the decision and the implementation year,
demonstrated that the IFRS adoption process is a continuous process and the contested
interplay between actors remains relevant even after IFRS adoption has been decided.
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7.4.1 IFRS vs US GAAP adoption decision: Was it ever about quality?
Internationally uniform accounting rules are a leap of faith, untested by experience or
by a significant body of academic results (Ball, 2006). Arguably switching from one good
quality accounting standard to another good quality accounting standard needed a bigger
leap of faith. A recent study in Canada revealed unintended consequences of IFRS
adoption where more Canadian companies reported under US GAAP after Canada adopt
IFRS in 2011. A study by Burnett and Jorgensen (2013b) found that more cross-listed
companies in Canada which could voluntarily adopt IFRS or US GAAP, decided to switch
from Canadian GAAP to US GAAP. Before IFRS adoption, about 20% of Canadian cross-
listed companies (45 out of 285) reported under US GAAP. In 2011, those 45 companies
continued to report unders US GAAP, but another 29 companies voluntarily chose US
GAAP over IFRS. When companies have options to choose standards, IFRS does not
always win the battle. In Switzerland where qualified listed companies have options to
choose IFRS, US GAAP or Swiss GAAP, 24 companies switched from IFRS to Swiss
GAAP since 2008. This is after the companies have adopted IFRS for a few years as
companies mostly used IFRS in 2005 (Fiechter et al., 2012). In Japan, since IFRS became
an option for more than 600 qualified listed companies in 2010, there were only less than
20 companies voluntarily adopting IFRS by 2013 (Bloomberg, 2013). This recent
phenomenon implies that companies differ in their perceived costs and benefits of
competing accounting standards.
However allowing few accounting standards in the capital markets increased the
monitoring cost by regulators which most countries avoided. With very few studies
comparing the reasons why companies voluntarily switch from one quality standard to
another, it is very diffucult to test the quality of IFRS as compared to US GAAP. As was
discussed in Chapter Three, some quantitative studies even revealed that US GAAP
produced better quality financial information than IFRS. (Lin et al., 2012; Bartov et al.,
2005; Leuz, 2003; Barth et al., 2012). Yet IFRS has been touted as a good quality set of
international accounting standards, on par with US GAAP, by advocates when educating
stakeholders in Canada and Indonesia.
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Although Canada and Indonesia exhibited more IFRS vs US GAAP debates than in
Brazil and the Philippines, however IFRS was not adopted because of its claimed superior
quality. In Canada respondents agreed that during the decision-making period, IFRS was
not ubiqutious knowledge among the stakeholders who were familiar with US GAAP. The
standard-setters needed to educate the stakeholders regarding the difference between
IFRS, US GAAP and Canadian GAAP. In Indonesia the educational materials and the
IFRS seminars were only available after the decision was taken in 2008. For Canada the
ability to get involved in the IFRS standard-setting process was a significant argument to
choose IFRS over US GAAP.
Most respondents from Indonesia and Canada commented on the importance of being
part of the international community. Canada has been taking part in in the international
arena of IFRS-making, while Indonesia’s international role and activities has increased
since the adoption of IFRS. Three international organisations often used by Indonesian
key actors were IFAC, the World Bank and the G20. On the other hand Canada’s
respondents were proud to mention that they were members of G4+1 and the fact that
Canadians hold several positions in IFRS governing bodies such as IFRS trustee, IFRIC,
IASB, IFRS Advisory Forum and ASAF.
Although Indonesia is not as influential as Canada in the international IFRS arena,
nevertheless the country’s international exposure and involvement has increased in Asia
since the decision to adopt IFRS in 2008. Indonesia’s standard-setters became more active
in the international activities of standard-setting. For example, Indonesia became the host
of the IFRS Policy Forum, an international event organised by the IFRS Foundation every
15 months which started in 2005. Indonesia also became active in the AOSSG and EEG.
Philippines, on the other hand, although it adopted IFRS since 2005, was not active in the
international arena.
7.5 Conclusion
The presented case studies of IFRS adoption processes in Canada and Indonesia have
some evident contrasts to the previously reported experiences in the Philippines and
Brazil. The adoption decision was risked to considerably more debate in Indonesia and
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Canada, emerging not from a governmental decision but being initiated by national
accounting standard-setters.
The accounting standard-setters may weigh the economic reasons of adopting IFRS,
i.e making accounting standards with minimum resources, but they may also have political
reasons to escalate their role as ‘partners’ of the IASB and being part of the greater world.
However one may argue that countries with a bigger capital market may face even more
pressure to adopt IFRS and abandon US GAAP entirely. Canadian securities regulators
tried to eliminate US GAAP as an option but they failed due to the strong resistance from
the users. Strong resistance from US GAAP users was also observed in Japan which will
be detailed in the next chapter.
The remaining two empirical chapters, Japan and the US exhibit two advanced
economies with capital markets of a significant size. Japan has a far less number of dual-
listed companies in the US compared to Canada, but the size of Japanese dual-listed
companies are much bigger like Mitsubishi, Toyota and Sony.
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Chapter 8. Market Mechanisms and IFRS Convergence in Advanced
Economies: The Case of Japan
8.1 Introduction
The competition in the international accounting standard-setting arena between US
GAAP and IFRS has forced countries to take sides. Chapter six discussed the IFRS
adoption process which utilised a legalistic mechanism (in the Philippines and Brazil),
whilst chapter seven discussed the adoption process which involved lobbying mechanisms
(in Indonesia and Canada). Whilst, some countries have prohibited the use of US GAAP
completely, others such as Canada, encountered strong support from US GAAP users in
the country, which compelled market regulators to allow US GAAP to remain as an option
after IFRS adoption. Japan provides an illuminating case study of a country with
international influence which is caught in the middle of the rivalry between IFRS and US
GAAP.
Japan, took a different path in institutionalising demonstrating how the decision-
making process to adopt IFRS can be an uneasy pathway for a developed economy when
strong lobbying power is exhibited by its multinational corporations. Japan’s capital
market is the second largest in the world (WFE, 2013) suggesting that any decision about
accounting standards would have a significant impact for both national and international
stakeholders.
The Japanese business system is dominated by a large powerful group of affiliated
companies (or keiretsu). Compared to previous sample countries, representatives from
Japanese corporations have more political power in influencing the government’s business
decisions. Japanese corporation representatives, sit in various decision-making bodies
such as the IFRS Advisory Council, Business Accounting Council of Japan (BAC), a
subset of the Japanese Financial Services Agency (JFSA) and the Accounting Standards
Board of Japan (ASBJ).
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Although, in international IFRS discourse, the US and Japan are often classified as
non-IFRS adopter(s), there is one significant difference between the Japanese and US in
regard to their IFRS convergence programmes. IFRS is available for listed and non-listed
companies in Japan while in the US, domestic listed companies do not have an option to
choose IFRS over US GAAP. Between 2001-2013, Japan changed its position towards
IFRS adoption several times in response to international pressure and developments in the
US. This chapter will discuss the IFRS convergence process in Japan emphasising the
particular institutional work undertaken in attempt to institutionalise IFRS.
This chapter will briefly discuss the history of Japanese accounting standards and its
route to IFRS convergence starting with its “Big Bang” regulatory reform in 1996. The
golden period of IFRS convergence in Japan began in 2005 and ended in 2010, followed
by a divergence from its stated adoption pathway after the tsunami of 2011. Japan made
few significant decisions during the transition period 2010-2013 which illuminates how
the US development influenced Japanese decision which led a strategic repositioning of its
IFRS adoption. The discussion section of the chapter then will discuss the institutional
work and the key actors in IFRS adoption process in Japan.
8.2 “Big Bang” and the harmonisation period: 1996-2004.
Historically, accounting developments in Japan have been largely controlled and
orchestrated by the government as it pursued economic expansion and enhanced level of
tax collection. Accounting practices are regulated by three laws – the Commercial Code
(CC), the Securities and Exchange Law (SEL) and the Corporate Tax Law. The CC,
enacted in 1890 follows the German Commercial Code. Accounting for CC requirements
operates under a codified law system and provides highly codified accounting system,
characterised detailed rules, conservatism and a lack of transparency(Shiba and Shiba,
2007; Koga and Rimmel, 2007). The SEL, a contract of CC, was promulgated in 1948 and
is closely based on the US regulatory framework (Shiba and Shiba, 2007). As Japan tried
to modernise its market infrastructure after the end of the second world war, it took half a
century for the Anglo-Saxon system to be assimilated into the Japanese (Saito, 2008). The
Japanese capital market grew rapidly and the Tokyo Stock Exchange (TSE) became the
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second largest market after NYSE and has a higher market capitalisation than the London
Stock Exchange (Roxburgh et al., 2011). Around 30 Japanese major corporations are dual-
listed on US and Japanese stock markets and US GAAP has always been an important
reference point for development in Japanese GAAP.
In the 1980s and early 1990s, internationalisation of financial and capital markets had
pushed Japan into market-capitalism without the necessary institutions functioning as they
should (van Mourik, 2007). In the mid-1990s, Japan suffered from severe financial crisis
when various banks and securities companies went bankrupt and government bond ratings
were degraded (van Mourik, 2007). This forced Japan to undertake institutional and
regulatory reform. In 1996, the Japanese government announced a ‘Financial Big Bang’
and commissioned BAC to reform the financial reporting system. This resulted in a series
of major changes to the regulation of financial reporting in Japan (Doupnik and Perera,
2007). One of the major objectives of the “Big Bang” accounting reform was to ensure
that Japanese accounting standards were equivalent to other international standards which
were US GAAP and IAS (van Mourik, 2007).
Prior to the “Big Bang” in 1996, accounting weaknesses were exploited by some
companies in Japan. The Japanese business system is unique, dominated by intertwining
main banks with Keiretsu which is a groups of companies that work together in order to
support each other’s activities and to reduce contracting costs (van Mourik, 2007). From
an international perspective, unique characteristics and the behaviour of Japanese firms
have been criticised severely for being closed and secretive which is reflected in Japanese
corporate accounting policy choices and disclosure practices (Koga and Rimmel, 2007).
The Japanese “Big Bang” in 1996 reformed the financial reporting system in Japan by
embracing the IASC’s IAS and moving closer to a market-oriented accounting standards
system (Asami, 2006). A number of IAS became effective in Japan between 1999 and
2003 with the emphasis on consolidated financial statements and significant revisions of
accounting standards in financial instruments, research and development costs and pension
accounting (Duangploy and Gray, 2007). However, the adoption of new IAS did not
necessarily generate comparable practice with other jurisdictions. For example, following
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the adoption of deferred tax accounting in 1998 (under IAS 12 Income Tax) major
Japanese banks recognised $55 million worth of deferred tax assets, without which the
banks have been insolvent (Skinner, 2008).
Amongst the important changes of the “Big Bang” reforms was the transfer of
financial services regulation from the Ministry of Finance to a new independent agency,
JFSA. The JFSA, which emulated the UK FSA was established in July 2000 and
responsible for ensuring that the financial system is reliable, vigorous, fair and efficient
(Benston et al., 2006). With the establishment of the JFSA, any accounting standard
produced by the BAC was given legal status by the JFSA pronouncement.
Japan had been relying on the slow-moving BAC to develop its accounting standards
since 1952. Its productivity was not sufficient to match the market participant’s
expectations to keep up with international development in the early 2000 as the IASC was
transformed into the IASB (Uozumi, 2007). The lack of ability and speed was the most
crucial problem as the council’s members were part-time. The BAC spent several years
developing just one new standard (Uozumi, 2007).
In 2001, Japan established the Financial Accounting Standards Foundation (FASF) as
the parent organisation of ASBJ. The establishment of FASF shifted the accounting
standard-setting in Japan from the hands of the government to the hands of an independent
private sector entity. FASF was supported by 10 associations53, politicians and regulators
and received funding from market participants. The ASBJ took over the function of the
BAC and the JICPA (Japanese Institute of Certified Public Accountants) in developing
accounting standards and providing practical guidelines. The main purpose of the ASBJ in
2001 was to facilitate the harmonisation of international accounting standards (Nishikawa,
2011).
53 1) Nippon Keidanren, 2) JICPA, 3) The Tokyo Stock Exchange, 4) The Japan Securities Dealers
Association, 5) The Japanese Bankers Association, 6) The Life Insurance Association of Japan, 7) The
Marine & Fire Insurance Association of Japan, Inc., 8) The Japan Chamber of Commerce and Industry, 9)
The Security Analyst Association of Japan, and 10) The Corporation Finance Research Institute, Japan.
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In seeking to harmonise its accounting standards to IFRS, Japan’s approach still
appeared at this time to be heavily influenced by US GAAP with some study claiming that
Japan would opt for whichever of US GAAP and IFRS offered the most conservative
accounting options (Koga and Rimmel, 2007). Japanese GAAP has been developed in to
a unique set of standards that have been influenced by IFRS and US GAAP but ‘less
transparent’ in general (Benston et al., 2006). For example, the business combinations
standard in Japan still allows pooling of interest under strict conditions and requires
amortisation of goodwill, whereas both IFRS and US GAAP prohibited pooling and
systematic goodwill amortisation (Benston et al., 2006).
“The development of accounting standards in post-war Japan had been a process
of catching-up with the US. Although, the process was almost completed by the
accounting ‘Big-Bang’ in the late 1990s, US GAAP, except [for] immoderately
ideological fair value measurement, had as much influence on the development of
our standards as IFRS did during the new challenging stage of global
convergence. No social system can get rid of path dependency, so we tended to
feel strong affinities with US GAAP. “ (Prof. Shizuki Saito, interview 31st July
2013).
Nevertheless, as Japanese companies developed into multinational corporations,
Japanese GAAP became a significant accounting standard in the global capital market. In
2005, among the Fortune 500 companies, Japanese GAAP was applied by 81 companies
(about 16.2%), while 200 companies used IFRS and 176 companies used US GAAP
(Prada, 2006). Before the EU adopted IFRS, Japanese GAAP was also one of the foreign
standards acceptable in European capital markets.
8.3 The decision-making period: 2005-2010
When the “Big Bang” accounting reform was more or less complete in 2001, the
general opinion in Japan at that time was that Japanese GAAP, after the “Big-Bang”
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overhaul, had achieved international equality 54 (Benston et al., 2006). Then the
unexpected Enron scandal erupted in the US. The American rules-based accounting
system as the major benchmark for Japanese “Big Bang” reform lost its international
credibility. Moreover, in 2002, the EU announced that companies listed in the EU capital
markets would have to use IFRS for the basis of their financial statements or standards
deemed equivalent.
Many stakeholders in Japan, including the ASBJ and Nippon Keidanren, believed that
Japanese GAAP was equally as good as IFRS but this message was not well understood or
received by the rest of the world. In 2002, IFAD assessed Japan as a country with no
commitment to IFRS convergence (IFAD, 2002). Shizuki Saito commented that the IFAD
assessment had been as follows:
Our objective was (and is) to seek international convergence working together
with the US and EU, and simultaneously developing our national standards
independently. In the first place, however, the idea was not understood abroad and
Japan was once labelled as a country that did not make a commitment to
convergence, together with Iceland and Saudi Arabia (the US was not considered
though). (Saito (2008), pg. 4.).
Similar to the business association Nippon Keidanren, the ASBJ also believed that
Japan, US and IFRS accounting standards were comparable, good quality international
standards and each had to respond to their own issues rather than just following the
standards of others (Saito, 2008). Saito also believed that Japanese GAAP and IFRS
should be both accepted by capital markets in Japan and the EU. Also, he argued that the
market mechanism should be allowed to decide which accounting standard is better than
others (Saito, 2008).
54 See the policy proposal issued by Nippon Keidanren in 2003: Seeking International Collaboration on
Accounting Standards, http://www.keidanren.or.jp/english/policy/2003/096/proposal.html, accessed 11th
August 2014.
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The Business Association, Nippon Keidanren on its a policy statement, complained
about the international criticism that Japanese GAAP was not on par with other
international standards.
In the past there were criticisms by some that Japanese accounting standards
lagged behind those in other countries, and that accounting and auditing in Japan
was unreliable. However, developments such as those referred to above have
already raised Japan's accounting and auditing standards to a level that compares
favourably with international levels. It is imperative that this should be fully
understood by people involved in the market both within Japan and overseas.
(Nippon Keidanren statement, 21st October 200355)
In response to the international criticism, the Ministry of Economy, Trade and Industry
(METI) of Japan issued a report in June 2004 advocating the acceptance of Japanese
GAAP as being equivalent to IFRS (METI, 2004). According to the report, some
accounting standards in Japan such as business combinations were comparable to IFRS,
but in fact were more conservative and therefore more comparable to US GAAP (van
Mourik, 2007).
Unfortunately, the CESR (Committee of European Securities Regulators) held a
different view to METI with regard to Japanese GAAP being equivalent to IFRS. The
CESR assessment of Japanese GAAP on June 2005 concluded that there were 26 areas of
difference between Japanese GAAP and IFRS (CESR, 2005). The CESR considered
Japanese GAAP not to be the equivalent to IFRS and this brought concern for Japanese
companies listed in the European market. The CESR assessment had a significant impact
on Japanese companies raising funds in EU markets (Skinner, 2008; Kaneko and Tarca,
2008). The number of Japanese listed companies on EU markets plummeted from 83 in
2006 to 24 companies in 2006. Japanese mega-corporations such as Toshiba, Hitachi, and
Matsushita Electrics delisted during this period (Uozumi, 2007). The number of bond
55 Available from http://www.keidanren.or.jp/english/policy/2003/096/proposal.html, accessed 11th
August 2014.
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issuers also declined from 182 in 2004 to 156 in 2005. The market participants expected a
clearer political strategy from the Japanese government with regard to IFRS adoption.
In response to the pressure from market participants, the ASBJ started to work closer
with the IASB at the beginning of 2005 by launching a joint programme for convergence
between the two boards. In July 2006, the BAC issued an interim report “Towards the
International Convergence of Accounting Standards” outlining the future direction for
international accounting standards convergence by being more proactive and allocating
more human resources to the project.
The Japanese accounting standards should maintain its global feature, not to
become a local rule, which would continue being accepted in global markets. […]
It is noted that the IASB had extended an invitation to receive the ASBJ staff in its
convergence programmes with the FASB. It is expected that such invitation be met
favourably, with a view to enhancing Japanese involvement in the international
standard setting process. Business and accountancy industries are also expected to
provide a full cooperation in ensuring qualified human resources. (JFSA press
release, 31st July 200656).
An important change of leadership at ASBJ took place in April 2007. Ikuo Nishikawa
was appointed to lead the ASBJ in replacement of Prof. Shizuki Saito who was not a
supporter of one set of global accounting standards and his position was clear through his
writings (Saito, 2011; Saito, 2008) and during his interview for this study. The former
IASB chairman, Sir David Tweedie acknowledged that Saito was opposed to IFRS in his
interview with Bloomberg (Bloomberg, 2013). In contrast, the subsequent ASBJ
chairman, Nishikawa had been perceived as more cooperative and pro-IFRS. The support
for full IFRS convergence in Japan became stronger after Saito was replaced by
Nishikawa as ASBJ chairman in 2007. As the Japanese representative on the IASC from
1993 to 1998, and a partner of Ernst and Young ShinNihon from 1990 to 2001, Ikuo
56 Available at: http://www.fsa.go.jp/en/news/2006/20060731.pdf, accessed 1st August 2014
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Nishikawa had been involved in the discussions on the making of certain IASs and
arguably was more supportive of the idea of one global accounting standard.
Upon the appointment of Ikuo Nishikawa, the IFRS convergence process in Japan
was expedited. The Tokyo agreement was signed in August 2007 between the IASB and
ASBJ to detail the working plan of IFRS convergence in Japan. The agreement aimed for
an ambitious target: 2008 to eliminate major differences between Japanese GAAP and
IFRS and set a target date of 30th June 2011 for resolving other issues. Based on the Tokyo
agreement, the ASBJ published a revised project plan in December 2007. The Tokyo
agreement and other developments had convinced the CESR to advise that Japanese
GAAP was equivalent to IFRS as stated in paragraph 10 of its report issued in December
2007:
CESR would recommend that, come June 2008, the Commission should consider
Japanese GAAP equivalent, unless there is no adequate evidence of the ASBJ
achieving to timetable the objectives set out in the Tokyo Agreement. - CESR (2007
p.4)).
The final decision of European Commission (EC) was issued in December 2008 to
acknowledge that Japanese GAAP was an international standard equivalent to US GAAP
and IFRS adopted by the EU. The EC issued Commission Regulation No:1289/200857 on
12th December 2008 to stipulate four acceptable accounting standards for a consolidated
financial report on the European capital market: “EU IFRS”, “FRS other than EU IFRS”,
“US GAAP”, and “Japanese GAAP”.
Upon the CESR equivalent assessment, the momentum for full IFRS adoption was
built up in Japan, especially after the Vice Chairman of JFSA, Masamichi Kono, became
the chairman of the IFRS Monitoring Board in January 2009. A major step was taken by
the BAC in publishing its interim report in June 2009. It was a very important document in
the history of IFRS convergence in Japan as it outlined the pathway for future IFRS
adoption in Japan. The 20 page document titled “Opinion on the Application of IFRS in
57 The document is available at : http://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX:
32008R1289, downloaded 31st July 2014
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Japan” 58 was a similar document to the US SEC roadmap issued in August 2008 59
(Nishikawa, 2011). The reports proposed that optional application of IFRS to qualified
companies should be allowed from the fiscal year ending March 2010. The report also
discussed that several issues needed to be monitored closely before Japan made a decision
in 2012 on the mandatory use of IFRS with a three year transition period. For example,
IFRS must accurately reflect the economic reality of businesses and trade practices in
Japan at the same time that it is a global standard (p.8). Other issues to be considered
before the 2012 decision were (p.8-11):
whether the governance of the IFRS Foundation had improved;
whether Japanese accounting stakeholders expressed opinions to the IASB
proactively and effectively;
whether IFRS was appropriately and promptly translated into Japanese; and
whether education and training on IFRS was sufficiently conducted in Japan.
The document also allowed the regulators to use their discretion in endorsing
individual IFRS as stated below:
… there may be cases in which Japan must suspend application of part of IFRS
developed by the IASB that are found seriously inappropriate and cannot be
recognised as accounting standards ‘that are generally accepted’ in Japan.“
(BAC Interim Report p.18, emphasis from the original document).
With the 2009 decision, IFRS would become an option for qualified listed companies
in Japan as from 2010. However, contrary to public understanding, the IFRS referred by
the BAC was not IFRS as issued by the IASB, but IFRS as endorsed by the JFSA or what
is popularly referred to in Japan as ‘Designated IFRS’. This IFRS is not identical with that
issued by the IASB because JFSA commissioners retain the right not to designate some
particular IFRS (although they cannot modify the original content of the IFRS). JFSA
58 The document is available at : http://www.fsa.go.jp/en/news/2009/20090701-1/01.pdf, downloaded
31st July 2014 59 The influence of US SEC roadmap in Japanese 2009 document was acknowledged by ASBJ
chairman, Ikuo Nishikawa in his article: A decade at ASBJ-from the past to the future.
https://www.asb.or.jp/asb/asb_e/asbj/message/voice/201109.pdf, accessed 6th August 2014
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endorsement or designation should occurs within one year of a standard or interpretation
being issued by the IASB or IFRIC.
The option of using ‘Designated IFRS’ from the end of March 2010 was also not
available for all Japanese-listed companies. Only companies which satisfied specific
requirements would have an option to use ‘Designated IFRS’. Based on an interview with
an ASBJ member, on this criteria, the ‘Designated IFRS’ would appear to be only
available to about 600 from a total of 3,470 listed companies in Japan. The main criteria
for companies to voluntarily apply for ‘designated IFRS’ were:
1. a listing on a securities exchange in Japan;
2. allocation of executives or employees with ample knowledge about ‘designated
IFRS’; and having in place a structure that enables them properly to prepare
consolidated financial statements in accordance with ‘designated IFRS’;
3. disclosure by companies, parent companies, other related companies or parent
companies of the other related companies either:
a. under laws and regulations of foreign jurisdiction periodically, as required
thereby, of documents on their business conditions prepared in accordance
with IFRS; or
b. under rules set by foreign securities exchange markets periodically, as
required thereby, of documents on their business conditions prepared in
accordance with IFRS; or
c. of ownership of a foreign subsidiary whose capital is equal to or exceeds
the equivalent of 2 billion yen.
Nevertheless, until the end of 2010 Japan seemed to be on track for adoption of IFRS.
The original intention for this BAC June 2009 decision was to make a decision on
mandatory adoption of IFRS around 2012 and to provide a transition period of three years.
Thus, if all criteria to adopt IFRS were satisfied in 2012, Japan would then make a
decision on when IFRS would be mandatory. In December 2009, JFSA made another
major decision to prohibit the use of US GAAP for qualified companies by 201660.
60 The decision by JFSA is available at http://www.fsa.go.jp/en/news/2009/20091211-8.html (accessed
6th August 2014)
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8.4 The transition period: 2010-2013
Before the tsunami hit Japan in 2011, the country was on a path to full IFRS adoption
by 2015 and prohibition of US GAAP use by 2016. Then on 11th March 2011, the
magnitude-9 earthquake hit the north eastern part of Japan and a tsunami followed one
hour after the earthquake. The earthquake and tsunami damaged nuclear plants in
Fukushima and several factories were forced to halt production due to blackouts. Large
factories owned by Toyota, Nissan, Honda, Nestle, and Sony suffered major damages
(Webb, 2011).
Two months after the tsunami, a group of Japanese manufacturing companies sent a
request to the Minister of Financial Services on 25th May 2011 (entitled “Requests on how
to deal with IFRS in Japan”). This was issued by major Japanese manufacturers and other
companies, such as Nippon Steel, Toyota Motor, Hitachi, Toshiba and Mitsubishi Electric.
They asked the government to re-consider the adoption of IFRS due to severe recovery
cost from the earthquake and the IFRS adoption cost would add their burden. The
objection from the manufacturers and also the damage caused by the tsunami forced the
JFSA to pull back its position with regards to their IFRS adoption pathway.
The Japanese Minister of Financial Services, Shozaburo Jimi publicly announced at a
press conference in June 2011, that the mandatory adoption of IFRS would not commence
in March 2015. The Minister also removed the termination date for the use of US GAAP
which had originally been set at 2016, so that the firms would be able to continue their use
of US GAAP61. Shozaburo Jimi also revised the transition time five to seven years. Should
Japan announce mandatory IFRS adoption in 2012, the application date would have
moved from 2017 to 2019. At this point, Japan was taking a similar position as the US
which had set no clear target on when they would make a decision on mandating IFRS.
The indecision of Japan’s ministry of finance was hugely influenced by the US’s
indecision towards IFRS convergence (also in 2011). The financial services minister
61 The transcript of press conference is available at :
http://www.fsa.go.jp/en/conference/minister/2011/20110621.html, accessed 6th August 2014
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explicitly stated in a press conference how the US SEC’s doubts about IFRS had also
encouraged Japan to re-assess its commitment to full IFRS adoption for:
“We are working on the assumption that the decision will be made in 2012 at the
earliest, so it is necessary to pay appropriate attention to the circumstances in
other countries, particularly the United States, which has made [it] clear that it
will make a decision over a period of five to seven years. To be extreme, my own
opinion is that Japan does not need to jump ahead and make its decision before the
United States. That is my frank opinion. After all, the United States is the world's
largest economy” (Minister of Financial Services Shozaburo Jimi answering
audience questions at a press conference, 21st June 2011).
An interview with members and staff of the ASBJ provided a similar view:
“We have been looking at US GAAP development and [the]US [position] back in
2008 to 2009 when [the] US seemed to have adoption of IFRS in a very short
period [in the future]. But looking at [how] subsequently the US seems they
[became] reluctant to [adopt] IFRS, the US development change the sentiment in
the Japanese community.” (ASBJ member, interview 1st August 2013).
“The simple statement of the Ministry means that Japan is not ready for the
decision. The reason behind that, first Japanese companies are not really happy
with IFRS adoption, partly because of the cost of transition to IFRS, but also they
are not convinced that IFRS is good quality. The other reason is the Japanese
earthquake in 2011 has affected the Japanese economy, so the government doesn’t
want to burden more. [The] US also has not adopted IFRS and it is the big factor
for the minister to postpone the decision about application of IFRS.” (Senior
technical staff of ASBJ, 23rd October 2012).
Many respondents from Japan revealed that stakeholders were not adequately
consulted before Minister Jimi’s decision, including the JFSA and the ASBJ. The chair of
the Securities Analysts Association of Japan (SAAJ) also admitted that he was not being
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consulted over the decision and did not agree with it, not least because it went against the
Japanese culture of decision-making, which views consensus amongst the key
stakeholders, as highly important for public policy matters62 . Other interviewees also
confirmed the tip-down nature of the decision:
“The decision by Mr. Jimi as Minister of Financial Services was rather a top-
down approach decision rather than bottom up. And we the Japanese government
are proudly operating the bottom up approach, but that decision was pretty much
a top-down approach. And the BAC did not recommend that. Other stakeholders
including the BAC and the ASBJ were not involved.” (One of the directors of
JFSA, interview 30th July 2013).
The decision to allow US GAAP currently still stands and Japan has never made a new
commitment to mandate IFRS for all listed and domestic companies. Since this 2011
announcement, the momentum for IFRS adoption in Japan has vanished. The June 2011
decision invited many negative responses especially from the European Commission. At
the IFRS advisory council meeting in June 2012, the director of the JFSA, Makoto Sonoda
received a very tough comment from Jeroen Hooijer, a meeting observer from the
European Commission,
“I’m flabbergasted, really I am flabbergasted. I don’t understand the strategy, I
am not sure whether there is still the political will in Japan to get there. […] at the
end of the day – and that is for your country, that was the same in my country, that
will be the same in the US – at the end of the day, it is a political decision. Do you
move to a new system or not.” (Jeroen Hooijer, observer from European
Commission – 19th June 2012 63).
62 Nemawashi is a Japanese term in business culture connotes patient, behind-the-scenes consensus-
building toward a decision of new policy. 63 Pod cast recording of the meeting is available from IASB website:
http://media.IFRS.org/AP8UpdateIFRSUSJAPAN18062012.MP3, accessed 3rd August 2014.
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Tatsumi Yamada, a member of the IASB from Japan 2001-2011 expressed his
disappointment during a telephone interview with Bloomberg BNA in November, 22,
2011.
“[the] momentum to incorporate IFRS in Japan stopped. Japan has suddenly
changed direction, to the negative direction. That’s a pity. Why can’t Japan make
its own decision?” (Tatsumi Yamada(Bloomberg, 2013).
In November 2012, the IFRS Foundation opened its Asia regional office in Tokyo to
assist Asian countries in their transition to IFRS.64 The opening of the IFRS satellite office
in Tokyo could have been anticipated to improve Japan’s profile as the leader of IFRS
adoption in Asia. Instead, this decision was ridiculed at the IFRS advisory council meeting
which questioned why the IFRS Foundation would like to open an office in Japan which
abandoned their commitment to fully adopt IFRS.
“Why on earth would you open an office in a country that doesn’t apply IFRS?”
(Jeroen Hooijer, observer from the European Commission at the IFRS advisory
council meeting, 19th June 2012).
An IFRS Foundation regional office to assist Asian countries in their IFRS transition
could arguably have been better situated in countries such as Hong Kong or even South
Korea which have fully adopted IFRS in 2005 and 2011 respectively. However, Japan was
willing to assist in funding the operation of the IFRS Foundation office, as disclosed in the
IFRS Foundation Annual Report 2013:
Separate Funding of £315,000 / ¥50,000,000 (2012: £613,000 / ¥81,000,000) was
received towards the set up and operations of the Asia-Oceania office located in
Tokyo. (IFRS Foundation Annual Report 2013, pg. 54.).
During 2012, there were further discouraging developments in the US as the SEC
failed to provide a clear direction as to when the US would incorporate IFRS (discussed in
64 IFRS Foundation press release: http://www.IFRS.org/Alerts/PressRelease/Pages/IFRS-Foundation-
opens-regional-office-in-Asia-Oceania.aspx
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more detail in chapter nine). The BAC held several discussions from June 2011 to June
2012 but did not change the stance over IFRS. A summary of its discussions which
resulted in three major decisions:
accounting standards applied for consolidated and non-consolidated
financial statements should be different;
unlisted small and medium-sized entities should not be subject to IFRS
application;
cases of IFRS voluntary application in Japan should be accumulated
further.
In 2012, the BAC observed that Japanese companies were not enthusiastic in adopting
IFRS voluntarily. Although IFRS had been available since 2010, the number of Japanese
companies that adopted IFRS was small. In 2010, for example, there was only one
Japanese company which switched to IFRS and by June 2013, there were only 14
Japanese listed companies voluntarily adopting IFRS (see Table 17).
The Name of the Companies
Nihon DempaKogya Co., Ltd. SBI Holdings, Inc.
Sumitomo Corporation Tosei Corporation
Hoya Corporation Rakuten, Inc.
Nippon Sheet Glass Co., Ltd Chugai Pharmaceutical Co.,
Ltd
Japan Tobacco Inc. Nexon Co., Ltd
Anritsu Corporation Monex Group, Inc.
DeNa Co., Ltd Sojitz Corporation
Table 17. Japanese companies to have voluntarily adopted IFRS by June 2013
Source: Interview with the JFSA senior staff
The slow voluntary adoption of IFRS in Japan may have been caused by a lack of
incentives for Japanese companies. Companies which were dual-listed in the US would
mostly have adopted US GAAP and companies which raised capital in Europe were
allowed to keep using Japanese GAAP as it had been assessed as being comparable to
IFRS. Besides IFRS is only optional for consolidated financial statements while non-
consolidated financial statements need to be prepared in accordance with the CC.
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“I am afraid that there is not enough incentive for Japanese listed companies to
apply IFRS to their financial reports. As accounting standards are closely related
to legal and regulatory systems, full adoption of IFRS would cause a
corresponding cost of conflict with domestic legal environments. […] On the other
hand, Japan is a capital exporting country with a current account surplus. So,
most of the Japanese firms rely, primarily, on domestic capital markets to meet
their funding needs. […] Finally above all, I am afraid corporate managers are
fed up with the IASB’s ideological dispute over fair value measurement of assets
and liabilities.” (Shizuki Saito, interview 31st July, 2013).
The slow voluntary adoption of IFRS in Japan stands in contrast to South Korea,
where mandatory IFRS adoption began in 2011. Listed companies in South Korea had an
option, since 2009, to adopt IFRS and 33 Korean companies voluntarily adopted IFRS,
followed by another 153 voluntary adopters in 2010 (KASB, 2014). In the IFRS
implementation year of 2011, as many as 1,142 listed companies in South Korea adopted
IFRS (KASB, 2014). The success of IFRS adoption in Japanese neighbouring countries
arguably brought more peer pressure for Japan, especially as the accounting standard-
setters of China, South Korea and Japan have had annual meetings since 2001 (ASBJ,
2013). This peer pressure might also influence Japan to take some strategic repositioning
regarding IFRS adoption in Japan which will be discussed in the next section.
8.5 Strategic repositioning: IFRS in Japan beyond 2013
The international disappointment, in response to the Japanese 2011 decision and the
reluctance of Japanese companies to embrace IFRS did make BAC consider taking
another strategic position. On 19th June 2013, the BAC of Japan published a policy paper
entitled “The Present Policy on the Application of the International Financial Reporting
Standards (IFRS)”65. The new policy aimed to encourage the wider use of ‘Designated
IFRS’ in Japan and to extend it to non-listed companies. The BAC removed two out of
three requirements relating to the use of IFRS, making more companies eligible to use
65 Available at http://www.fsa.go.jp/en/news/2013/20130621-1/01.pdf, accessed 5th August 2014
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IFRS. The requirements of being ‘listed in the market’ and ‘owning a foreign business or
being foreign funded’ were removed, leaving one remaining requirement, which was
having sufficiently suitable accounting system for companies to produce consolidated
financial statements using IFRS. With this decision, ‘Designated IFRS’ became an option
for more than 4,000 Japanese companies, where as previously it was only available for
around 600 companies.
However in parallel with this decision, the BAC also introduced a new layer of GAAP
for Japanese companies, designated as ‘Japanese-endorsed IFRS’ (or dubbed J-IFRS in
Japan). J-IFRS is different from ‘Designated IFRS’ which is the IFRS as endorsed by
JFSA without any modification. J-IFRS is a set of accounting standards which reflects
Japanese perspectives on IFRS and allows the ASBJ to adopt IFRS with modifications if
necessary. One of the modification for example is to allow amortisation of goodwill which
is prohibited under ‘Designated IFRS’. ‘Designated IFRS’ is a set of IFRS designated by
the JFSA without modification but JFSA reserved its rights to delay the effective date of
new IFRS standard. On July 2014, ASBJ named this J-IFRS in to Japanese Modified
International Standards (JMIS)66.
The creation of JMIS, the ASBJ argued, would simplify the comparison as the ASBJ
would modify the IFRS instead of adopting the substance of IFRS in various documents
under the umbrella of Japanese GAAP.67 Japanese GAAP has a different taxonomy to
IFRS. Therefore although IASB claimed that Japanese GAAP has been harmonised with
IFRS in substance, it is a daunting task to map a particular IFRS with its corresponding
Japanese GAAP standard. Understanding what constitutes Japanese GAAP can be
challenging. Under the securities and exchange law, Japanese GAAP consists of the
following (Yaekura, 2005):
1. ordinances issued by the JFSA including regulations of financial statements
2. BAC principles
3. BAC opinions, standards and interpretations
66 Exposure Draft of ASBJ Japanese Modified International Standards on 31st July 2014. Available at:
https://www.asb.or.jp/asb/asb_e/endorsement/exposure_drafts/exposure_20140731_02_e.pdf (Accessed at 11th August 2014
67 Interview with vice chairman and member of ASBJ, 30th July 2013.
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4. JICPA practical guidance including Accounting Standards Committee Reports
; and
5. (where applicable) industry-specific regulations (e.g., banking regulations
The strategy to create ‘Japanese IFRS’ was against the common norm that IFRS
should be adopted without any modifications. Some jurisdictions which have adopted
IFRS have made minor alterations, for example, Brazil did not adopted the revaluation
model for property, plant and equipment and only allowed the historical cost model.
Allowing such exceptions in the IFRS adoption process is still acceptable for the IASB
(private conversation with senior staff of IASB). JMIS, on the other hand, may replace one
principle with another opposite principle such as bringing back the amortisation of
goodwill. Table 18 provides the comparison of permissible accounting standards in Japan
before and after the 2013 decision.
2010-2013 After June 2013
Japanese GAAP: Many are still rules-based
or industry specific. This may include
accounting standards, practical guidelines,
practical solutions and JICPA reports.
Japanese GAAP: Many are still rules-based
or industry’s specific. This may include
accounting standards, practical guidelines,
practical solutions and JICPA reports.
US GAAP for US SEC registrants US GAAP for SEC Registrants
Designated-IFRS: IFRS as designated by
the JFSA available for all qualified listed
companies (around 600 listed companies).
JFSA cannot modify the standard but can delay
the effective date of a single IFRS.
Designated IFRS: IFRS as designated by
the JFSA available for listed and non-listed
companies.
Not available JMIS: IFRS as modified by the ASBJ.
Available for listed and non-listed companies as
long as the internal company infrastructure
allows
Table 18. Accounting standards in the Japan before and after June 2013
Japanese delegates at the IFRS Advisory Council meeting in October 2013 strived to
convince the international community that J-IFRS would be a temporary decision to
encourage Japanese companies to use the ‘Designated IFRS’ which is considered as ‘the
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pure-IFRS’. However the decision to create J-IFRS also indicated that Japan wanted more
flexibility in adopting IFRS while retaining its sovereignty over Japanese GAAP.
While continuing to allow the use of pure IFRS, creating an endorsement system that
examines individual standards from the Japan’s viewpoint of ‘IFRS as they should be’
or ‘IFRS suitable for Japan’ and adopts the standards after deleting or revising some
standards as necessary, is considered useful for the purpose of ensuring the
implementation of flexible responses in Japan. (BAC policy statement pg.7).
Such a decision to allow four different standards (Japanese GAAP, US GAAP,
Designated IFRS and JMIS), although JFSA claimed it would be temporary, have raised
some concerns from other international stakeholders as to whether this new development
would be a long term condition in Japan. Members of the IFRS Advisory Council, which
comprise a wide range of international organisations including the Big Four accounting
firms, the World Bank, IOSCO, the IMF and standard-setters, and challenged the JFSA at
the meeting in October 2013:
“Is there something in the legislation that you are reporting to us today that
requires it would be revisited in five years’ time, three years’ time to actually make
sure that this doesn’t exist as four sets of GAAP for 25 years of time.“ (A member
of the IFRS advisory council, meeting at 18th October 2013).
JFSA delegates answered that Japan has no plans to revisit the decision in the near
future as to how long the temporary J-IFRS would be available for use. This was
discomforting, not least because the permission to use US GAAP in Japan also started
(nearly 40 years ago) in 1976 as something ‘temporary’. The Japanese Minister of
Finance’s decision in the Ministerial Ordinance No.28 stated that for the time being
consolidated financial statements according to US GAAP and filed with the US SEC could
be issued instead of consolidated financial statements in accordance to Japanese GAAP
(van Mourik, 2007). US GAAP was never meant to be something permanent in Japan
when it was allowed for the first time. US GAAP was permitted because Japan was still
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developing its accounting standards for consolidated financial statements which were
completed in 1997.
There was concern among the member of IFRS Advisory Council that the decision to
permit more accounting standards would cause confusion among market participants.
“As a regulator does your agency have any concern about the ability to oversee
and monitor four different sets of standards. With four sets of standard does it
create any problem for you as regulator? Have you solicited any input from
analysts or from the user community in Japan and how do they feel having four
sets of standards.” (A member of the IFRS advisory council, meeting at 18th
October 2013).
JFSA answered confidently in the 18th October meeting that it had secured support
from the Japanese business communities for this decision. A few days before the BAC
decision, the Keidanren68, published a policy proposal on 10th June, 2013: “Basic Stance
on Japan’s Future Corporate Accounting System”. Keidanren’s policy proposal was very
similar to the BAC proposal. The policy proposal stated in their summary69 no 2, 3 and 4:
(2) Under the current international situation, it is necessary to maintain the
current system in Japanese market where JGAAP (Japanese GAAP), IFRS, and US
GAAP co-exist. (3) At the same time, measures should be taken to expand the
voluntary application of IFRS. (4) As for JGAAP, its quality needs to be
maintained at a high level. As for IFRS, an endorsement process for evaluating the
validity of each standard should be introduced. (The summary of Keidanren’s
policy proposal, 10th June 2013)
The IASB and the IFRS Foundation have been against such locally modified IFRS for
years and have strongly requested countries to adopt IFRS word for word. Producing
68 Kaidenren is the Japan Business Federation, an organisation with a membership of 1,309
representative Japanese companies of Japan, 112 nationwide industrial associations and 47 regional
economic organisations (as of 1st July 2014). 69 The summary of policy proposal is available in http://www.keidanren.or.jp/en/policy/2013/056.html,
accessed 5th August 2014.
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Japanese-endorsed IFRS, although the JFSA and the ASBJ have said it was only
temporary, sent an unmistakable signal that Japan would not adopt IFRS fully in the very
near future. It conflicted significantly with another parallel strategy to encourage the wider
use of IFRS in Japan.
Japanese respondents revealed that these two conflicting decisions were apparently
intended to placate the IFRS Foundation and others involved in international accounting
standard-setting as well as its corporations who are reluctant to adopt IFRS. To retain the
influence through Japanese seats in various IFRS standard-setting arenas such as the IFRS
Trustees and the IASB, Japan needed to be perceived as ‘moving forward’ towards IFRS
adoption. Moreover, as Japan became the chair of the IFRS Monitoring Board, it brought
more pressure to the country to promote the wider use of IFRS in Japan. ”
“If Japan doesn’t use IFRS, there’s a pressure. Many people say Japan you don’t
use IFRS why are you chairing the IFRS Monitoring Board? And Japan you are
not using IFRS why should I take your position as a trustee and [member of the]
IASB. […] and the politician thinks it is important for Japan to have a seat in the
international place […] so many people agreed that Japan should keep influencing
IFRS otherwise, basically, we are following what other countries think.”
(Anonymous respondent, IASB senior staff in Tokyo’s office, interview 29th July
2013.)
“I don’t know but it is often said that the FSA tried to play up to the IASB. As long
as the full adoption of IFRS was impractical, they had to render devoted service to
the IASB in order to keep their seat on the Monitoring Board of the IFRS
Foundation. It is not my own guess but a thing of which I have heard so much.”
(Anonymous respondent, accounting professor, interview 31st July 2013).
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This decision to provide more accounting standards options was commented on in an
article in the ICAEW magazine “Economia”70 as a messy compromise:
Japan has accounting standards to spare. Indeed, even as other countries simplify
their financial reporting, Japan’s internal debate over standards has led to the
proliferation of accounting options. Businesses already use Japanese GAAP and
can also voluntarily plump for either US standards or what may be called pure
International Financial Reporting Standards (IFRS), as issued by the international
standard-setter. But with debate raging over the use of full IFRS Japanese
companies will shortly be presented with yet another set of standards to opt for - a
kind of IFRS light, or, as locals have dubbed it, J-IFRS. One external observer
described the decision to economia as ‘a messy compromise’. (Economia, 7th
October 2013).
Nevertheless, the 2013 decision demonstrates the sensitivity and complexities
surrounding the adoption of IFRS in Japan. The path towards IFRS convergence in Japan
has never been isolated from other national and international events. Besides their national
event such as 2011 tsunami, Japan IFRS pathway was also highly influenced by decisions
made in Europe and the US. The next Table 19 summarises an important milestone of
IFRS convergence in Japan with the relevant international and national events.
Relevant international events
Japanese events
November 1996 “Big Bang” accounting
reform
October 2002 Norwalk Agreement IASB
and FASB
July 2001 the establishment of ASBJ
2005 Adoption of IFRS in Europe January 2005 ASBJ-IASB launched a joint
programme for convergence
April 2005 US SEC published a ‘roadmap’
aimed at elimination of the reconciliation
requirements for foreign registrants using
IFRS
June 2005 CESR advice: Japanese GAAP is
not equivalent to international standards
July 2006 BAC published “Towards
70 The article is available at: http://economia.icaew.com/business/october-2013/japan-opts-for-IFRS-almost,
accessed 5th August 2014
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International Convergence of Accounting
Standards”
November 2006 Establishment of Japan-EU
monitoring board
October 2006 ASBJ published the IFRS
convergence project plan
April 2007 Ikuo Nishikawa was appointed
as ASBJ chairman replacing Prof. Shizuki
Saito
November 2007 US SEC allows IFRS use
for foreign private issuers
August 2007 IASB-ASBJ Tokyo
Agreement signed
December 2007 CESR advice : Japanese
GAAP is equivalent to other international
standards
December 2007 ASBJ published the revised
project plan based on the Tokyo Agreement
August 2008: US SEC issued the roadmap
towards the required adoption of IFRS for
the US issuer.
January 2009: IFRS monitoring board was
established. The commissioner of JFSA
became the chair of the board.
June 2009 BAC published ‘Interim Report’
to allow IFRS for qualified companies in
2010 and a roadmap to make a decision in
2012 whether IFRS would be mandatory in
Japan.
December 2009, JFSA decided to prohibit
the use of US GAAP by March 2016.
2009-2012 US started to slow down its
IFRS convergence process. Please refer to
chapter nine for more detail on the US case
study.
March 2011, Earthquake and Tsunami in
Japan
June 2011 JFSA abandoned the IFRS
convergence pathway published in 2009.
US GAAP remains an option for US SEC
registrants until the unforeseeable future.
No target year when IFRS would be
mandatory
November 2012 the IASB opened a
regional office in Tokyo, Japan.
July 2012 : BAC published an interim paper
which summarised deliberations from June
2011-June 2012
June 2013 BAC published the “The Present
Policy on the Application of IFRS” : IFRS
became option for listed and non-listed in
Japan and the introduces ‘Japanese-
endorsed IFRS’.
Table 19. Japanese IFRS convergence timeline with relevant international events
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8.6 Discussion
Japan’s decision to embark on IFRS convergence in 2005 has been very much
influenced by the decision of the EU in adopting IFRS (van Mourik, 2007; Kaneko and
Tarca, 2008; Skinner, 2008; Uozumi, 2007). As the second largest capital market, Japan
is an important country for the IASB - without Japan on board, any set of international
accounting standards would find it difficult to earn the title ‘global’. Therefore, Japan’s
decision to allow IFRS as an option in 2010 was widely celebrated by IASB. This decision
was leveraged by the chairman of the IASB in numerous speeches to try to convince the
US to adopt IFRS:
“Japan now provides an option for domestic Japanese companies to prepare
financial statements in accordance with IFRS, while formally deciding next year
on mandatory adoption of IFRS. Japan has also signalled that it will eliminate the
option for the use of US GAAP in 2016.” (Speech by David Tweedie, addressing
the US Chamber of Commerce, 10th March 201171).
“IFRS are no longer just for Europe. In the last five years we have seen IFRS
adoption move at an astonishing pace. […] In Asia-Oceania, Australia, Hong
Kong, Korea, New Zealand and Singapore are also full adopters. Japan already
permits some companies to report using full IFRSs and will decide next year
whether to mandate a full transition to IFRSs.[…] Of course, the countries that
still have to make further and final steps towards full IFRS adoption are looking
very carefully at what is happening here in the United States. (Speech by Hans
Hoogervorst to the AICPA Conference, Washington 6th December 201172).
However, when in 2011, Japan decided to abandon its 2009 IFRS roadmap, the
decision was highly criticised by international IFRS supporters. Similarly, international
71 The full speech is available at: http://www.IFRS.org/news/announcements-and-
speeches/Pages/convergence-or-not-speech.aspx (accessed at 25th September 2015)
72 The full speech is available at : http://www.IFRS.org/Alerts/Conference/Pages/Hans-Hoogervorst-
AICPA-Conference-SEC-and-PCAOB.aspx (accessed at 25th September 2015)
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outcries were also documented against the US SEC’s lack of decision in 2012 (this will be
discussed in more detail in chapter nine). Japan clearly changed its commitment to adopt
IFRS fully in response to the decision of the US. Further, to avoid upsetting the supporters
of US GAAP in Japan, (especially Japanese dual-listed corporations) Japan chose to US
GAAP as an option. However, to be perceived by the international community as
supporting the goal of achieving one set of global standards, the JFSA allowed IFRS as an
option for non-listed companies in 2013.
The BAC decision in June 2013 to promote competition amongst standards in its
jurisdictions was applauded by the US. The remark by FASB Chairman73, Russel G.
Golden before the Keidanren and Financial Executives International clearly expressed
support for the action taken by Japan:
As we work toward developing more converged global standards, it is critically
important that we also maintain and improve the high-quality of our national
accounting standards, including Japanese GAAP and US GAAP. There are likely
to be occasions when preserving the integrity of our national business cultures
require us to maintain some differences in national accounting standards. These
views of the Keidanren and BAC are consistent with discussions we have had at
the FASB. I would go further, however, and tell you that I believe it is critically
important that Japan and the United States together take a leadership role in
advancing these principles throughout the world. By building a stronger
relationship among our standard-setting bodies, I believe we can make this vision
a reality. (Speech by Russel G. Golden, meeting in Tokyo, 16th October, 2013).
Japan’s pride in its own accounting standards and insecurity about being isolated from
the international community, has resulted in mixed decisions about IFRS adoption.
Japan’s recent decision to relax the requirements for companies in Japan has made IFRS
available both for listed and private companies. The decision emerged as a way to
maintain Japanese influence in the IFRS policy-making arena (similar reason was also
73 The full written remark is available at :
http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocument
Page&cid=1176163511018, accessed 5th August 2014
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advocated by Canada). However, at the same time the fact that Japan decided to create a
Japanese version of IFRS indicates that Japan has had reservations on IFRS quality and
does not want to relinquish its right to modify IFRS when it is felt that Japanese
accounting methods are better ( e.g. goodwill amortisation).
8.6.1 Market competition as institutional work in IFRS convergence processes
As demonstrated in previous chapters, countries have been involved in various
institutional works to adopt IFRS. Some countries chose a legalistic mechanism where by
it was legally mandated for IFRS to be adopted. On the other hand, the countries without
strong legal support pursued lobbying mechanisms to convince various stakeholders and
reach consensus on the decision to adopt IFRS. The lobby mechanism took a longer time
for the decision to emerge relatively to the legalistic mechanism. Japan undertook a
different pathway to the institutionalisation of IFRS - on which was less coercive and
creating which essentially a competition among accounting standards in its jurisdiction.
This more competitive environment for accounting standards is ostensibly similar to
what has happened in Switzerland, where listed companies have options between IFRS,
Swiss GAAP and US GAAP. However, in contrast to Switzerland, Japanese officials on
various occasions enunciated that they supported the goal of one set of global accounting
standards 74. The authorities in Switzerland did not indicate any such support in its survey
to IFRS Foundation.75 Thus, the accounting standards competition in Switzerland serves a
different purpose. Switzerland allowed competition between standards in order to remain
neutral and not take side between IFRS and US GAAP, while Japan created competitions
to institutionalise IFRS in a country in a non-coercive way.
The environment where market participants can voluntarily choose accounting
standards has been advised by some scholars. (Kothari et al., 2010; Walker, 2010; Saito,
2008; Sunder, 2002). Kothari et al. (2010) envisioned a setting where the FASB and
74 For example in the article by Ikuo Nishikawa “A Decade of ASBJ”, 15th September 2011; Survey by
IFRS Foundation filled by ASBJ for IFRS jurisdiction profile and BAC Report 30 June 2009. 75 Based on the IASB survey filled by the standard setting body of Switzerland. The survey is available
at: http://www.IFRS.org/Use-around-the-world/Documents/Jurisdiction-profiles/Switzerland-IFRS-
Profile.pdf, accessed 6th August 2014.
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IASB compete on reputation as this could foster more innovation in accounting standards
development. The authors also suggested that in order to level the playing field under the
FASB-IASB competitive approach, European listed companies should be allowed to
choose FASB standards (Kothari et al., 2010). The idea of more than one set of global
accounting standards was also proposed by Walker (2010). He urged caution to imposing
one set of global accounting standards for all capitalism as he argued that there are
varieties of capitalism, and it is not obvious which variety is the best. The forced adoption
of one single set of accounting standards runs the risk of restricting other types of
capitalism (developing) and the world’s economy may be better served by alternative
forms of capitalism with accounting standards tailored to suit its need (Walker, 2010).
Further, when standard choice has existed, the evidence is not that supportive of the
dominant quality claim made for IFRS. In Switzerland for example, where the three
standards are permitted for listed companies, there has been a recent switch from users of
IFRS back to Swiss GAAP. From June 2008 to 2012, 24 listed companies in Switzerland
which switched from IFRS to Swiss GAAP. 4 companies switched in 2012 including the
famous watch producer Swatch in October 2012 (Fiechter et al., 2012). In Canada, 15% of
qualified companies (29) which have options to use Canadian GAAP, IFRS or US GAAP
chose US GAAP instead (Burnett and Jorgensen, 2013b).
Market competition as an IFRS convergence mechanism can be expected to take a
longer period for IFRS to be institutionalised in the country compared to legalistic
mechanisms. Eventually IFRS may well become the de facto standard when the majority
of market participants use IFRS over other standards. This could never be achieved if the
companies are not convinced that IFRS would bring economic benefit to them. The
decision for firms choosing an accounting standard may have different logics than when a
country makes a decision. As demonstrated in this study, the authorities of a country may
decide to adopt IFRS for political reasons, such as being part of the international
community. Firms, arguably, would have more economic considerations in choosing a
standard such as the transition cost. For example, research by Fiechter et al. (2012)
revealed that most of the Swiss companies which switched from IFRS to Swiss GAAP did
this due to the extreme or increasing complexity of IFRS and the high administrative costs
associated with reporting under IFRS.
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8.6.2 Key actors in IFRS convergence process in Japan.
The role of JFSA, BAC and ASBJ in the IFRS convergence were acknowledge by
most of respondents. Besides ASBJ, interviewees also identified JICPA as a strong
supporter of IFRS adoption in Japan. JICPA was quoted by a respondent as “too eager”
for the adoption of IFRS which “fed up” some Japanese companies76. Respondents also
commented that JICPA strong support to IFRS adoption may be influenced by the
economic motives as IFRS adoption would create opportunities for JICPA members to
offers IFRS consultancy to their clients.
“JICPA had been consistently advocating the adoption, full adoption of IFRS for the
benefit of their own businesses with no high minded view on it.” (Anonymous
respondent, accounting professor, interview 31st July 2013).
Similar to Brazil where the decision to adopt IFRS created a private standard-setter
which then undertook the responsibility of institutionalising IFRS, the decision to
harmonise with international standards also created a new standard-setter: the ASBJ. Often
dubbed as the Japanese version of the FASB, the new standard-setter then became the
‘technical voice’ of Japan in the international IFRS arena. The ASBJ also became the
gate-keeper, the endorser of each individual IFRS entering the country.
However, for a country with a strong governmental influence in accounting standard-
setting like Japan, relinquishing authority to an apparently private standard-setter was a
significant and unexpected move. Other governments, for example China, conveniently
kept their standard-setter inside the government while adopting IFRS. From interviews
with the respondents, the main reason for Japan to establish a private standard-setter was
the perception that a private standard-setter was deemed necessary to secure a seat for
Japan on the newly established IASB.
Back in 2000, when the nominating committee was established to select IASB
members, there was no one from Japan among its seven members77. Anxiety was raised
76 Interview with respondents No.50, an accounting professor, 30th July 2013 77 Seven members of nominating committee Camfferman, K. & Zeff, S. A. (2007) Financial Reporting
and Global Capital Markets: A History of the International Accounting Standards Committee, 1973-2000: A
Chapter 8. Market Mechanisms and IFRS Convergence in Advanced Economies
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among Japanese stakeholders that the country was not going to have a representative on
the IASB and Japan would lose its international influence (Uozumi, 2007). Some
respondents remembered this period and commented that the pressure to be represented at
the IASB’s table was pivotal to shifting the standard-setter from the governmental domain
to the private domain. Japan eventually was represented in the IASB by Tatsumi Yamada
in 2001, followed by Takatsugu Ochi in 2011 until June 2016.
“In order to be a member, to support the IASB, each country must have a sort of
private standard-setter. IASB didn’t tell Japan anything. But the perception at
that time is that in order to be a member, in order to send a member from Japan
to the IASB board. And Japanese standard-setters must be from the private sector.
That was the perception at that time. That was the driver for the Japanese people
to create the ASBJ.” (Former IASB member from Japan interview 6th March
2013).
Japan established the new private standard-setter ASBJ; however the BAC has been
the standard-setter in Japan since 1952. It is the ASBJ’s initiation to work closer with
IASB in 2002 which resulted in the Tokyo Agreement of 2007 but behind-the-scenes
support from the BAC was imperative for the ASBJ to pursue the IFRS convergence
project. In most interviews, respondents acknowledged that the BAC was a very powerful
body in setting the strategic decision of Japanese accounting standards and that the ASBJ
implemented the decisions of BAC.
“We initiated the convergence project in 2004 2005 and there is no statement by
the BAC of the FSA. And we also initiated the Tokyo agreement. We had the Tokyo
agreement in 2007 and there is no explicit endorsement by the FSA [BAC of FSA].
However, we consulted with the BAC before and after the agreement. We
consulted with the BAC and they have informally endorsed to agree our position .”
(Interview with vice chairman of the ASBJ, 1st August 2013).
History of the International Accounting Standards Committee, 1973-2000. New York: Oxford University
Press.: Arthur Levitt (Chairman of US SEC), Michael Prada (Chairman of France’s COB), Howard Davies
(Chairman of UK FSA), Andrew Sheng (Chairman of the Hong Kong Securities and Future Commission),
James D. Wolfensohn (President of World Bank), James E. Copeland, Jr., (Chief of Executive of Deloitte),
Karl-Hermann Baumann (Deputy Chairman of Germany Accounting Standard Board)
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The 2013 decision to create J-IFRS was also proposed by the BAC in its interim report
which was then executed by the ASBJ. This is quite different from the case of Indonesia
and Canada where their respective private accounting standard-setters were the ones who
making strategic decisions with regard to IFRS adoption.
“The FSA is responsible for legislative changes, which include the adoption,
whether to require the application of IFRS and we are operating under the
legislative requirements. So, if the FSA suddenly abandons the Japanese
accounting standards, we have no responsibility for the development of the
Japanese Accounting Standards. If they say endorsement of IFRS isn’t necessary,
well we shouldn’t [be developing J-IFRS] but they themselves have to consult with
the key stakeholders which is the BAC.” (Vice chairman of ASBJ, interview 1st
August 2013).
The BAC is an advisory council working in a milieu where Japanese companies have
been working in collaboration with, instead of adversarial to, government policy-making.
For example one of the more vocal members of the BAC is Yukihiro Sato, senior
economic adviser at Mitsubishi Electrics. He is also the chairman of the Corporate Finance
Executive Committee of METI, and a councillor in the Japanese Financial Accounting
Standard Foundation (retired in 2013).
The influence of Japanese corporations in various advisory councils creates a unique
regulatory field compared to other countries. In Canada, big companies are involved in
decision-making through the comment letters to regulators. In Japan, corporations are
involved in the closed-door deliberations of various advisory committees. The Keidanren,
is also a very influential organisation with regard to IFRS convergence in Japan.
Keidanren policy statements are often issued at almost the same time as the JFSA policy
statements with strikingly similar conclusions.
8.7 Conclusion
This chapter has deliberated the case study of Japan where the path to institutionalising
IFRS in the country involved accounting standards competition or the market mechanism.
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In contrast with the legalistic mechanism discussed in chapter six, the market mechanism
is a method where IFRS was introduced to the country through the voluntarily adoption by
market participants. The listed companies in Japan have four options of accounting
standards: IFRS, Japanese GAAP, J-IFRS and also for eligible companies, US GAAP.
Most of the listed companies in other IFRS adopting jurisdictions do not have these
options as IFRS is mandated- such that in some countries IFRS is the only standard
available as the local standards ceased to exist upon the IFRS adoption.
The case study of Japan also demonstrated the actor’s effort to “create” a new belief
system of “one global accounting standard” in the regulatory field was not an easy task.
The IFRS supporters such as JICPA and ASBJ have been trying to institutionalise IFRS
and their efforts have been partially successful as Japan seems to move to a more IFRS
favourable way by allowing IFRS for non-listed companies. However in the same time,
the institutional work to disrupt the use of old accounting standards have been less
successful in Japan. The study of IFRS convergence in Japan offers a refined explanation
to the institutional work theory that in the case of institutional disruptive work failure, the
old institution may compete with the new one in the same field. This may create a
competing logic of accounting standards in the national regulatory field.
Relying on such a market mechanism arguably is a less coercive pathway to
institutionalising IFRS into the country. JFSA has clearly stated that this competitive
environment is only temporary in order to achieve one set of global accounting standards.
With the size of the capital market (as big as Japan or the US), any sudden decision may
bring an unintended impact on the world economy. Thus, although the market mechanism
may take a longer time, it could be a less risky transition. Over time, more companies may
decide to adopt IFRS and eventually it may become the de facto set of standards in Japan.
There will be also other possibility that the competition between Japanese GAAP, US
GAAP and IFRS in Japan remains and IFRS will not become the de facto set of standards.
The next chapter will discuss the case of the US which also has a similar pathway to
Japan. The way the US introduced IFRS to the country is to make it available for foreign
private issuers in 2007. However, in creating competition for accounting standards, an
advanced economy such as the US and Japan can expect to endure international criticism
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from IFRS supporters as such decision may bring a network effect for other countries to
follow their pathways. As demonstrated in this chapter, Japan received disappointing
comments from the international community following its decision in 2011 to abandon
their IFRS roadmap. One can expect the international disappointment to be louder in the
case of the US when it deserted its roadmap to adopt IFRS. After the US showed a clear
intention to retain their US GAAP, many people expect that the US will follow the
Japanese approach by allowing IFRS for their domestic companies in a very near future.
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Chapter 9. One Set of Global Accounting Standards: Is IFRS Adoption
the Only Way? The Case of the US
“So, although we may never fully attain the goal of having a
single set of high-quality global accounting standards, I have
believed and continue to believe it is a goal worth pursuing.”
(Bob Herz (2013, pg.138))
9.1 Introduction
Compared to other countries in this study, the position of the US is unique with regard
to IFRS adoption. It is the country with the largest capital market in the world (WFE,
2013) and has a long tradition of accounting standard-setting. Its national accounting
standard-setter has strong technical competency with an annual budget comparable to the
IASB. At the time of writing, the US remains indecisive as to when and how they are
going to adopt IFRS for their domestic companies.
As exhibited in the previous empirical chapters, the main reasons for IFRS adoption
are not because it is a proven better accounting standard than US GAAP. For countries,
like Indonesia and the Philippines, which do not have much influence in IFRS-making and
governance arena, the internationality of IFRS and the recommendations from
international organisations have played an important part in the country adopting IFRS.
However for countries with stronger influence in IFRS-making and governance like
Canada and Japan, a significant reason for these countries adopting IFRS was the
opportunity to influence the process. This opportunity would not have been available if the
countries had adopted US GAAP, a set of standards developed to cater to US needs.
An analysis of the US is important in order to understand the IFRS adoption process as
any US decision creates a network effect on the rest of the world. The SEC played a
pivotal role in the creation of the IASB and took a leading role in encouraging IOSCO to
endorse the IASB’s core standards for cross-border listing (IFRS-Foundation, 2012). The
decision of the SEC in 2007 to allow the use of IFRS for foreign private issuers
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encouraged other countries to adopt IFRS. Thus, the movement away from IFRS by the
US in 2012 served to make the future possibility of one set of global accounting
convergence uncertain. International supporters of IFRS vocally showed their
disapointment with what they perceived as a ‘betrayal’ of the commitment to create one
set of global accounting standards.
This chapter aims to analyse the development of the US attitude towards IFRS for the
period 2000 to 2013. The US attitude towards the adoption of IFRS was receptive
between 2000 and 2005, and became more so from 2005 before it suddenly became
reluctant in 2009. Finally in 2012, the SEC refused to make any decision regarding IFRS
adoption and decided to maintain the status quo. This chapter analyses the rationale of the
shifting US position over 13 years and how the consequent effects on globalisation of
IFRS.
The case study of the US is the last of the six countries sampled in this study. As
discussed in the previous chapters, many US GAAP supporters, such as in Canada and
Indonesia, were silenced by IFRS supporters in the decision-making process. In other
countries such as Brazil and the Philippines, US GAAP supporters (if any) were evidently
not among the key decision-makers involved in the process. In Japan, certain due
objections to IFRS were taken into account in the decision-making process. The case of
the US is an important case as US GAAP is not only a long standing incumbent set of
standards but considerations and choices within the US over the relative status of US
GAAP and IFRS could be expected to have global repercussions given the global power
and standing of the US.
This chapter starts with the discussions surrounding the Norwalk agreement in 2002,
followed by the discussions which led to the US SEC decision in 2007 to lift the
reconciliation for foreign and private issuers. The major part of this chapter is the analysis
of the 2009-2011 period of what many respondents refer to as ‘the disappointment period’.
This is the period when international organisations perceived the US to be abandoning its
own commitment to the adoption of IFRS. On the other hand the US seemed to respond to
the international disappointment by publicly reiterating its commitment to the goal of one
set of global accounting standards, for example in numerous speeches by both the US SEC
and FASB chairmen. However, the way the US wants to achieve that goal, by keeping US
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GAAP as the IFRS competitor, may not be well understood by the other players in the
international IFRS arena.
9.2 2000-2005: The warm period
The US has always been an important global player in international accounting
standard-setting. The US SEC was intimately involved in shaping the structure of the
IASB which very much reflects the FASB model - an independent and technically
competent group of experts, rather than being a board of representatives as per the
European model (See Camfferman and Zeff, 2007p. 492). US GAAP essentially shaped
the early versions of IFRS (see Camfferman and Zeff, 2007 chapter 5) and until recently
the SEC believed that US GAAP was superior to all other alternatives, forcing all foreign
issuers listed on the US stock market to prepare their financial statements using US GAAP
or other accounting standards that were explicitly reconciled with US GAAP using Form
20-F.
For many years, US GAAP was considered an international high quality accounting
standard. US GAAP having been the major reference point used by many countries when
developing their local accounting standards (Radebaugh et al., 2006). Previous empirical
chapters have also demonstrated how US GAAP became a major reference point for all
sample countries in this study for developing their accounting standards. Although the
influence of US GAAP in the international arena has been diminishing over the years as
many capital markets prohibited the use of US GAAP, nevertheless some respondents still
perceived US GAAP as a global accounting standard.
“I still believe our standard is a high quality global standard.” (Current FASB
member, interview 19th September 2013).
“Yes it is still a global accounting standard, Canada and Japan still allow US
GAAP.” (Former IASB Member interview, 23rd September 2013).
US stakeholders generally hold a strong view that their accounting standards are high
quality. However the perceived quality of US GAAP was significantly impaired by the
Enron and other major corporate scandals in the early 2000s. These scandals, which
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abused various accounting loopholes, apparently shook the SEC’s and the FASB’s
confidence in US GAAP, leaving them wondering if it offered good protection for
investors. The US Congress questioned whether the rules-based GAAP promulgated by
the FASB and the SEC should be replaced by principles-based standards78. US GAAP was
under scrutiny by the US public according to the chairman of the Financial Accounting
Foundation (FAF) in its 2002 annual report:
In the wake of the widely reported corporate scandals of last year, the quality of
US financial reporting was put under the microscope of the nation’s leaders,
including the President and Congress – as well as the public and media… The
public’s interest in accounting issues soared in 2002 as newspaper headlines
blared, almost daily, about corporate financial misdeeds. As a result, investor
confidence suffered and cries for freedom were raised in many circles. (Manuel
Johnson, chairman of the FAF, 2002 FAF Annual Report, p.3).
With Europe’s decision to adopt IFRS by 2005, coupled with numerous corporate
scandals in the US and the appointment of Bob Herz, a former IASB part-time member, to
lead the FASB, it would have seemed logical to expect the US to build a closer
relationship with the IASB.
Looking at the world of accounting and financial reporting in 2002, there were
two sets of widely accepted standards in use across the world: International
Accounting Standards (formerly IAS now IFRS) and US GAAP. (…) So it made
sense that achieving a truly global set of accounting standards would require the
IASB and FASB to work together. Also the reporting scandals of 2001-02 led some
to question the long-held belief in this country that our standards were the best in
the world. (Herz,2013, p 67).
The first joint meeting between the IASB and FASB in September 2002 was an
important starting point for IFRS convergence efforts. The meeting between the two
boards at the FASB’s offices in Norwalk, Connecticut yielded an agreement for them to
work together to remove the differences between IFRS and US GAAP. The MoU was
78 The US Congress asked the SEC to undertake a study on the adoption by the United States financial
reporting system of a principles-based accounting system in the Sarbanes-Oxley Act of 2002. See section
108(d)(1) of the Public Accounting Reform and Investor Protection Act of 2002 (the Sarbanes-Oxley Act)
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issued in October 2002 to formally document their mutual commitment to work together
in developing high quality comparative accounting standards. In a joint FASB and IASB
press release79, both chairmen of the boards commented on the need for cooperation and
partnership.
Between 2002 and 2004, the two boards were undertaking projects aimed at removing
narrow differences between the two standards. These projects were called short-term
convergence projects, reflecting the belief that these were easy projects and could be
completed in a relatively short period of time. It turned out that the Boards underestimated
the delicacy of the issues concerned, as several of the projects proved to be more
complicated and less short-term than originally envisioned (Herz, 2013). In 2004, the two
boards agreed to undertake three major joint projects: business combinations, revenue
recognition and financial statement presentation. Again the two boards did not find these
joint projects to be easy. Accounting for business combinations for example, is still not
fully converged although the two relative standards are now much more closely aligned.
The joint project on revenue recognition was only completed in the second quarter of
2014. The project on the presentation of financial statements was put on hold in June 2010
as the boards worked towards completing other major joint projects.
The two board’s commitment was further strengthened in 2006 when the IASB and
FASB set a specific milestone to be achieved by 2008. Subsequently, a series of meetings
between the two boards took place regularly to discuss the convergence project and the
number of scheduled meetings increased after September 2009 in response to the G20 call
for the two boards to double their effort on the convergence project.
The September 2002 meeting was the first of what would be many joint public
meetings between the two boards. At first, the meetings were held twice a year for
two or three days at a time. Then in 2006, that was expanded to three times a year.
Since October 2009, the boards have been meeting jointly most months and
sometimes multiple times during a month, either in person or via teleconference.
(Herz, 2013, pg. 103).
79 News release of FASB on 29th October, 2002: FASB and IASB Agree to Work Together toward
Convergence of Global Accounting Standards. http://www.fasb.org/news/nr102902.shtml , accessed in 5th
May 2014.
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The tension on accounting technicalities between US GAAP and IFRS was highlighted
in the Canadian AcSB strategic report in 2006 which proposed Canada should become the
‘peace maker’ between the IASB and the FASB.
The AcSB will also encourage the IASB and the FASB to continue to work co-
operatively and reach common conclusions on issues. When necessary, the AcSB
will offer to play the role of ‘honest broker’ to resolve any tensions between the
IASB and the FASB. (AcSB Strategic Plan 2006-2011 p.18.).
Although as the two boards found enormous challenges in convergence at the technical
level, the tone at the top remained very supportive of achieving the goal of one set of
global accounting standards. The positive tone towards the adoption of IFRS in the US
being constantly reaffirmed by SEC Chairman Christopher Cox and FASB Chairman Bob
Herz. During this period, the world was optimistic that the two boards would overcome
their differences and achieve a common goal of one set of global accounting standards.
The warm attitude to IFRS adoption in the US has influenced other countries to be
more inclined to adopt IFRS. With Europe's decision to adopt IFRS in 2005 and the strong
support from the SEC for the convergence project, momentum increases to secure ‘one
global accounting standard’. For example an agreement was made between the ASBJ and
the IASB in 2005 for IFRS-Japanese GAAP convergence with a positive hope that the US
would eventually adopt IFRS80.
9.3 2005-2008: The golden period
The period from 2005 to 2008 was arguably a ‘golden’ period for IFRS and US
GAAP convergence. It was the period when the US signalled to the world that the
possibility of adopting IFRS in the near future could be a reality. It was not a coincidence
that this golden period took place when key decision-making positions in US standard-
setting were filled by pro-IFRS figures such as the SEC Chairman Christopher Cox, the
SEC Chief Accountant, Conrad Hewitt and FASB Chairman, Bob Herz.
80 Interview with ASBJ senior technical manager date 23 October 2012
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The expanding use of IFRS, coupled with the uneven playing field on issues being
discussed in Europe (US GAAP was allowed in European capital markets but IFRS was
not allowed in the US stock markets), has been both a challenge and an opportunity for the
SEC in fulfilling its mandate as well as its long-stated support for the development of a
single set of high-quality international accounting standards (Herz, 2013). Those
challenges and opportunities were addressed by the then SEC Chief Accountant Don
Nicolaisen in an article published in Northwestern University’s Journal of International
Law and Business (Nicolaisen, 2005). Bob Herz and Don’s successor, Conrad Hewitt
believe this article was the impetus for the SEC decision of 2007 to allow IFRS for foreign
private issuers in the US81.
The article became referred to as the SEC staff ‘roadmap’, however it did not provide
a plan or framework for IFRS adoption in the US or for completing the convergence
between US GAAP and IFRS. Rather, the article proposed a process and a set of
conditions and related activities for SEC staff to consider whether to recommend that the
SEC eliminated its reconciliation requirements for foreign registrants using IFRS. The
article provided a timeline and suggested that the SEC staff recommendation to eliminate
US GAAP reconciliation requirements for foreign filers using IFRS could come in 2009 or
sooner.
In November 2007, sooner than expected, the SEC removed the requirement for
foreign private issuers registered in the US to reconcile their financial reports with US
GAAP if their financial reports complied with IFRS as published by the IASB. Although
the decision to eliminate the reconciliation requirements had been anticipated for some
time, nevertheless the swiftness of the SEC decision was a surprise for many stakeholders,
and even for the IASB (See Zeff, 2012). Many interviewees stated that they had not
expected that the SEC would have made the decision so soon. Some were surprised at how
far the SEC went in its decision.
“There were some degrees of surprise. We always knew that they were drafting
about reconciliation, but we didn’t know about the timing that it would come out
very quickly.” (Current FASB member, interview 26th September 2013).
81 From the interview of both respondents.
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“The first objective of the core standard project of the old board working with
IOSCO was to get the SEC to remove the reconciliation requirement, not to make
the US adopt [IFRS]. But for people to be able to access the US market. The 2007
decision, it was earlier than we expected. We hoped that it would happen in 2008
or 2009.” (Former IASB member, interview 23rd September 2013).
“We weren’t surprised at the decision because they had built it up for a while. We
were not surprised when it happened; maybe we were surprised at how far they
went. We thought perhaps they were having a minimum number of
reconciliations.” (Member of AcSB Canada, interview 20th September 2013).
The unexpected timing of the 2007 decision, according to most of the respondents was
because it was close to the 2008 election. 82 Christopher Cox had been perceived as
someone who believed in a single global capital market and it was not certain that the
ruling Republican Party would win the 2008 election. If the Democratic Party won the
2008 US election, the chairman of the SEC would be replaced and the new chairman
might have different priorities that may not include IFRS adoption. Nevertheless the 2007
decision had a domino effect on other countries. Various countries, such as Korea, Japan,
Canada, and Indonesia made the decision to adopt IFRS shortly after this decision with the
significant of such being noticed by the SEC:
“In July, the SEC proposed to allow foreign private issuers to file using
International Financial Reporting Standards (IFRS), as promulgated by the
International Accounting Standards Board, without reconciling to US generally
accepted accounting principles (GAAP) as they are now required to do.... I would
note here that the International Accounting Standards Board and the Accounting
Standards Board of Japan announced in September that they have targeted 2011
to achieve convergence between Japanese GAAP and IFRS. That is a very
propitious development.” (SEC Commissioner, P. Atkins, speech to the American
Chamber of Commerce, Tokyo, Japan, 16th October 2007).
After the removal of the US GAAP reconciliation requirement, some respondents
stated that they may had now hoped that the US would eventually adopt IFRS for US
82 This was expressed by a former of IASB member and member of AcSB Canada.
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companies or even make it an option for US listed companies – and commented that the
US were clearly considering this:
“One year after the SEC made that decision; Paul (Paul Cherry- chairman of
AcSB, added) and I went to Washington to talk with the SEC chief accountant and
some other senior staff. So we had a little discussion partly about “So now you
have allowed foreign companies to use IFRS, would you ever do that for US
companies?” The chief accountant at that time was a gentleman named Conrad
Hewitt, he leaned across the table looked at me and said “there’s really no reason
why we shouldn’t or couldn’t allow US companies to adopt IFRS.” They clearly
had thought about it.” (Member of AcSB Canada, interview 20th September
2013).
The SEC decision of 2007 was a very positive signal from the US on working towards
one set of global accounting standards. Such momentum continued to build up with the
issuance of a Concept Release by the SEC in 2007 to explore the possibility of allowing
US issuers to use IFRS in their filings. Prior to this release, few had believed that the SEC
would ever go this far towards the possible use of IFRS by US companies. The peak of
IFRS momentum in the US happened on August 2008, and according to Zeff (2012) the
SEC with unanimous, enthusiastic support from all of its participating staff offices and
divisions, approved a rule proposal containing a new roadmap towards the required
adoption of IFRS by US issuers.
The SEC published its proposed roadmap of 2008 outlining key activities that needed
to be completed before it could decide whether IFRS should be adopted for US filers. The
SEC would therefore evaluate progress in 2011, and by then it would decide whether to
require mandatory use of IFRS as issued by the IASB as from the start of 2014. The
roadmap also sought feedback on whether or not the SEC should introduce staffer
mandatory adoption based on market capitalisation, with large accelerated filers required
to file using IFRS in 2014, accelerated filers in 2015 and non-accelerated filers in 2016.
The definitions of accelerated filer and large accelerated filer under the US Exchange Act
reference the size of an issuer based on its worldwide public float of its equity securities
(SEC, 2008). The coming of 2011, as the SEC decision-making deadline, influenced Japan
and Canada also to set that year as their target for full IFRS convergence/adoption.
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The SEC also proposed permitting a limited group of major US multinationals, which
fulfilled certain requirements, to adopt IFRS early, starting with 2009 calendar year-end
filings. The new roadmap received 204 comment letters which according to Bob Herz was
surprisingly low given the potential significance of what the SEC was proposing (Herz,
2013 pg. 122) The comment letters had a mixed response from US stakeholders.
Although commentators on the proposal generally expressed support for the goal
of a single set of high-quality globally accepted accounting standards, many
expressed concerns with various aspects of the proposed roadmap. (Herz (2013
pg. 122).
The 204 comment letters 83 came from various affiliations such as corporations,
academics, investors, accounting firms and regulators. An analysis of 163 comment letters
by Adhikari et al. (2014) revealed that 73% of respondents supported the general notion of
one set of global high quality standards, however most respondents preferred the
convergence process over adoption. Many respondents (24%) believed that the cost of
adoption of IFRS would be high at a time of great economic uncertainty (Adhikari et al.,
2014), especially since the US was in turmoil during the financial crisis of 2008.
The US SEC also organised roundtable meetings with stakeholders to discuss the
roadmap. Conrad Hewitt, SEC Chief Accountant at that time, during interview recalled
that there were three roundtable discussions on the 2008 roadmap, and that there was little
controversy when the SEC developed in proposals. He did not see any major impediments
to the US adopting IFRS in the next seven years, as suggested by the proposal.
“… We had over 200 comment letters. (...) in the meantime we also held three
roundtables with financial statement users, preparers, investors on proposal we
release to gather as much information as we can. There was very little controversy
when we developed the proposal. (…) there were not major problems.” (Conrad
Hewitt, interview 30th April 2014).
One of the respondents who also observed the roundtable discussions confirmed that
there was little controversy during the discussions.
83 All comment letters are available at http://www.sec.gov/comments/s7-27-08/s72708.shtml, accessed
13th August 2014
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“The US will always find an objection to do something they don’t want to do. They
always find a bunch or reasons like, it’s not the right time. The SEC had a number
of roundtables. Leslie Seidman (former FASB chairman – added) and I were there
as observers. They had big companies, users, small companies. There wasn’t
anything raised as a big problem there that we hadn’t really thought about and
addressed.” (Former IASB member from Canada, interview 23rd September 2013).
While the comment letters may have suggested that US stakeholders were not too
enthusiastic in adopting IFRS, the tone of the top of US SEC officials continued to be
encouraging with respect to IFRS convergence. During this period, the SEC assessment of
IFRS as a set of high quality accounting standards was reiterated by SEC chairman and
commissioners at various public engagements:
“The convergence of international accounting standards — in pursuit of our
ultimate goal of the development of a single set of high-quality global accounting
standards — remains one of these key priorities.” (SEC Commissioner,
K.L.Casey, speech to the 35th AICPA conference, 10th December 2007).
“The rapidly increasing interest in IFRS in the United States, and the rapidly
increasing acceptance of IFRS in the rest of the world, also reflect a growing
consensus that these standards will in fact be able to deliver the high quality,
consistency, and global comparability that so many have advocated for so long.”
(SEC chairman Speech to the American Chamber of Commerce, 18th April 2008).
In summary, the period of 2005-2008 is the golden period when the likelihood of IFRS
adoption in the US seemed high. However while SEC leaders had successfully issued a
roadmap with regard to adopting IFRS, they did not have the chance to execute the
roadmap. The global financial crisis of 2008 and the change of administration brought a
significantly different impact to the appetite for adopting IFRS in the US as will be
discussed in the next section.
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9.4 2009-2012: The disappointment period
With the inauguration of US President, Barack Obama on January 2009, SEC
Chairman Christopher Cox and Chief Accountant Conrad Hewitt resigned to allow the
new administration to appoint new leaders. Barack Obama appointed Mary Schapiro as
the chairman of the SEC. During Christopher Cox's tenure as chairman, the likelihood of
IFRS adoption in the US was high, but this was to change than during Mary Schapiro's.
The period after the Cox era, according to one interviewee from Canada became known as
the ‘disappointment period’
“They (Cox’s regime – added) never had the opportunity to follow through, but
they certainly had thought about it (the adoption of IFRS – added). In some senses,
what happened since is a bit of a disappointment.” (Member of AcSB Canada,
interview 20th September 2013).
“Certainly under Chairman Cox’s regime there was a higher likelihood of the US
adopting IFRS then after it was Cox’s regime.” (FASB member, interview 26th
September 2013).
Mary Schapiro assumed her position as US SEC leader during the very challenging
period of the global financial crisis. The 2008 financial crisis has been considered as the
worst crisis since the Great Depression in 1930s (Jagannathan et al., 2013). Starting in
2007 with the defaults of subprime mortgages in the US, the financial crisis spread out to
Europe. The US was heavily blamed by the international community for mishandling its
capital market and starting the global financial crisis (Chua and Pang, 2012). Barack
Obama and Mary Schapiro needed to restore international confidence in ability to manage
its capital market. Many US respondents in the interview argued that the financial crisis at
that time made the SEC to view urgent matters, thus the IFRS convergence was not being
major priority.
With the appointment of Schapiro, US enthusiasm over IFRS adoption quickly started
to turn cold. On various occasions and in various public statements, Schapiro expressed
her reluctance to move to IFRS as illustrated below:
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“When it comes to international accounting standards, it’s critical that these
standards are converged in a way that does not kick off a race to the bottom.
American investors deserve and expect high standards of financial reporting,
transparency, and disclosure - along with a standard-setter that is free from
political interference and that has the resources to be a strong watchdog. At this
time, it is not apparent that the IASB meets those criteria, and I am not prepared to
delegate standard-setting or oversight responsibility to the IASB.” (SEC
Chairwoman Mary Schapiro’s letter to Sen.Carl Levin- quoted by Accounting
Today 27th January, 2009).
Schapiro’s January statement elicited many negative responses, especially from
Europe. FEE (The Fédération des Experts Comptables Européens) even suggested that the
IASB should walk away from its convergence strategy:
The Fédération des Experts Comptables Européens, which represents more than
500,000 accountants across Europe, said the International Accounting Standards
Board should cut its losses and walk away from its US -GAAP convergence
strategy. The statement adds to the growing concern regarding the IASB’s focus on
US adoption of global standards. There are mounting fears the negotiations are
distracting the board from its core task of maintaining international accounting
rules. FEE believes the IASB should change direction and instead ‘concentrate
exclusively on major improvements and simplifications in International Financial
Reporting Standards over the medium term’. ‘The point has been reached where
there are diminishing returns from further converging with US GAAP, in
particular now that more and more countries, including major economies such as
Japan and India, move towards direct adoption of full IFRS,’ the body said.84
(AccountancyAge, 23rd July 2009).
International pressure was evident at the first G20 summit in April 2009, where
individual members were urged to work towards one set of global accounting standards
(G20 Leaders’ Statement para 15). This, however, did not give enough push to the SEC.
Furthermore, U.S divergence from IFRS adoption became more apparent when the new
84 Mario Christodoulou, “FEE Calls for a Halt on Convergence Talks”, AccountancyAge, 23rd July
2009
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SEC chairman dismissed its 2008 roadmap and issued a revised commitment delaying it
until February 2010. The day before the US SEC met to approve the new 71-page
commitment statement, pressure came from across the Atlantic. The ICAEW, encouraged
the US to make a clear decision with regard to IFRS convergence:
Dr Nigel Sleigh-Johnson, head of the financial reporting faculty said the world
needs clarity over the US’s commitment to global standard. "More and more
countries are converging to IFRS, with major economies such as Canada and
Japan currently in the late stages of convergence,” he said. "Now is the time for
the SEC to show leadership to the world at a time of continued economic
uncertainty.”85(AccountancyAge, 23rd February 2010).
The SEC issued its Commission Statement in Support of Convergence and Global
Accounting Standards on 24th February 2010. The release reiterated the SEC’s long-
standing support for the development of a single set of high-quality global accounting
standards. It also stated that it now planned to make a decision in 2011 on whether, when,
and how to incorporate IFRS in to the US financial reporting system.
The SEC staff subsequently published various reports, including a May 2011 staff
paper which focused on exploring a possible method of IFRS incorporation. In May 2011,
the SEC’s Office of the Chief Accountant issued a paper in which it described one
possible IFRS adoption approach which it labelled ‘condorsement’. The word
‘condorsement’ resulted from combining the most common IFRS adoption approaches
used in other jurisdictions, namely convergence and endorsement. In November 2011, the
SEC released two reports on IFRS adoption. The first report compared US GAAP and
IFRS and a second report analysed IFRS in practice. On 5th December 2011, SEC Chief
Accountant, Jim Kroeker announced a delay in the anticipated US SEC decision on the
IFRS work plan for US markets.
The long expected staff final report in July 2012 represented a serious setback for
international organisations who were starting to be impatient for US commitment. FASB
85 Mario Christodoulou, “It's time for the US to show some leadership on convergence: ICAEW”,
AccountancyAge, 23rd February 2010
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members tried to reduce the expectation of IASB and other national standard-setters of the
likelihood that the SEC would make a clear decision in favour of IFRS convergence. In
the IFASS86 meeting in Kuala Lumpur, Malaysia on March 2012, Tom Leinsmeier (FASB
member) explained the unfavourable possible outcome of the anxiously awaited SEC staff
report. IASB Chairman Hans Hoogervorst expressed his deep disappointment at the
IFASS meeting. Many accounting standard-setters from other jurisdictions also expressed
their frustration towards the US at that meeting as stated in the IFASS report on the
meeting:
5.3 The IASB chairman expressed disappointment with Mr.Linsmeier’s
observations. He was discouraged by the delay in the SEC stating its intentions
regarding the incorporation of IFRSs into the US financial reporting system. In
addition, the uncertainty was affecting the IASB’s efforts to converge IFRSs with
US GAAP. Most jurisdictions in the world are committed to IFRSs and the IASB
will proceed at full speed with its work. He urged the SEC to make a decision one
way or the other. – (IFASS, 2012)
5.5 Representatives from France, Australia and the UK expressed frustration
at the lack of a decision from the US. The representative from France said there
was much diversity in financial reporting around the world and this needs to be
attended to. The representative from Australia said the uncertainty regarding the
lack of a US decision is creating greater pressure on jurisdictions not to be faithful
to IFRSs. The delay in a decision from the US could result in that country being
isolated from the rest of the world, which would suffer from the loss of US
standard‐setting talent. – (IFASS, 2012)
When the SEC finally issued its final staff report on July 2012, many parties expected
that it would give clear recommendations to the SEC commissioner on when and how
IFRS would be incorporated in US financial reporting system. The report was issued
several few weeks after it was finished, on the last day before SEC Chief Accountant Jim
86 IFASS or International Financial Accounting Standard setters used to be called NSS (National
Standard setters) is an informal group of various accounting standard setters which hold meetings twice a
year.
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Kroeker’s resignation took effect. Jim Kroeker's resignation combined with the release of
the final staff report raised speculation that the staff paper would not meet public
expectations.
The staff report was cautious in terms of assessment of IFRS as a high quality
accounting standard. Although the report acknowledged that the quality profile of IFRS as
a set of accounting standards had improved globally, the report still saw a wide gap
between US GAAP. The paragraph below illustrates some areas which needed to be
improved according to the SEC staff report:
The standards that are issued by the IASB are generally perceived to be high
quality by the global financial reporting community. However, there continue to be
areas that are underdeveloped (e.g., the accounting for extractive industries,
insurance, and rate-regulated industries). By comparison, US GAAP also contains
areas for which guidance is in need of continued development (e.g., push-down
accounting and government grants), but the perception among US constituents is
that the ‘gap’ in IFRS is greater. (IFRS-Foundation (2012, p.4))
Although the report complimented the governance of the IASB, it questioned the
independence of the IASB due to its funding sources especially its reliance on the funding
from the Big Four accounting firms. The report also expressed concern about the
timeliness of responses to widespread accounting issues by the IFRS Interpretations
Committee (IFRIC), and it suggested that the IFRS adoption would be costly for US
public companies. Lastly, the report concluded that IFRS did not receive wide enough
support from US stakeholders to be adopted.
… There appears to be relatively less support within the US financial reporting
community for the designation of the standards of the IASB as authoritative for use
by US issuers for domestic reporting purposes. (IFRS-Foundation (2012, p.4)
The July 2012 staff report caused more leaders of international organisations to
express their concerns at the US position. Steven Maijoor, the chairman of ESMA
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(European Securities and Market Authorities) expressed his disappointment in his
speech87 in London on 12 November 2012:
“Although fully understanding the domestic economic and political constraints of
the SEC, I am personally disappointed with the lack of ambition regarding IFRS
on the other side of the Atlantic. Patience has been a real virtue for us over the last
few years and there have been a number of efforts to facilitate the adoption of
IFRS in the United States. To name just two: the IASB/FASB memorandum of
understanding, and the monthly joint Board meetings. Some of the efforts to
facilitate US IFRS adoption were difficult topics for the IASB’s Constituents to
accept, especially in Europe, but they were willing to pay the price to get the US
on board. Today I cannot avoid the feeling that all these efforts do not seem to be
enough which suggests that it will never be enough. I believe many people feel as I
do, which is disappointment that there is no progress or clear sign of political will
to keep IFRS adoption high on the agenda in the US.“ (Steven Maijoor, speech to
PwC Meet the Experts conference, 12 November 2012, London.)
The IFRS Foundation and the IASB both expressed their concern and disappointment
that the SEC had deserted their ‘gentlemen’s agreement’. The Chairman of the IFRS
Foundation, Michel Prada88 mentioned the ‘G20 agreement’ to remind the SEC that it
should be honoured by member countries.
“We very much hope that the SEC will consider positively in the near future a
transition to global accounting standards, thus fulfilling the objective reaffirmed
by the G20 leaders in each of their meeting communiqués. (Michel Prada, Speech
before the 29th Conference, Geneva, 31st October 2012).
Hans Hoogervorst, chairman of the IASB offered his view over the US’s indecision at
the AICPA conference in December 2012, also referring to the G20 agreement.
After a decade of progress, after tireless and sometimes painful work by the boards
to bring about convergence between IFRS and US GAAP, after two years of
87 Full speech is available from this link http://www.esma.europa.eu/system/files/2012-731.pdf
(accessed 15th September 2014) 88 Full speech is available from this link http://unctad.org/meetings/en/Presentation/ciiisar29_3110M_
MichelPRADA.pdf (accessed 15th September 2014)
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analysis and report writing, many people around the world expect a clearer
perspective of this country’s intentions with IFRS. That is why we really need a
tangible sign of continued US commitment to a single set of global standards.
Merely striving for greater comparability between two standards will not do. We
tried that during the 1990s and it was a failure [re. IASC effort ]. In the absence of
a credible, tangible step on the part of the United States, international concern
could turn in to international scepticism. The G20 calls for global accounting
standards would start to ring increasingly hollow. We cannot allow that to
happen [emphasis added]. (Hans Hoogervorst’s speech to the AICPA
Conference, 4th December 2012, Washington D.C).
The secretary-general of IOSCO, David Wright expressed his view on the SEC
decision by being more cynical and tried stating that the world would keep moving on
towards one integrated capital market without the US:
“So the US has a unique opportunity now, perhaps with coalitions of the willing,
to help shape and lead a movement towards more effective global regulatory
institutions – a window that may last 5-10 years or so, but not more. After that, the
US’ relative share of global financial markets is set to decline significantly, and
naturally its influence as well.
I believe most of the world would be prepared to consider work on such a project –
and I believe, with or without the US – it will eventually happen like with the
International Financial Reporting Standards or IFRS. Isolationists will no doubt
plead what they always plead. They will argue, with their 19th century logic, that
the US will be better off alone, not sharing any sovereignty. Perhaps they will
continue to believe that in 15-20 years’ time the world will be composed of
disconnected, independent islands – the biggest of which can project its views on
others. But surely that is the past and a denial of globalization. To repeat, the new
emerging world will have very soon many big, interconnected capital markets.
There will be many more sharks in the pond with far more influence.” (David
Wright, speech to the Atlantic Council, Washington D.C, 10th December 2013).
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The ICAEW, firmly called on the IASB to stop its convergence efforts and to start to
concentrate on other countries which had committed to adopt IFRS:
The era of convergence between IFRS and US GAAP should be ended formally in
a matter of months, not years. Further amendments to proposed and existing IASB
requirements designed to harmonise standards with the US would not be justified
unless they represent a significant improvement in IFRS financial reporting. The
IASB should now focus its attention squarely on the needs of the 100 plus
jurisdictions that have officially adopted its standards, and on working to
encourage those countries that have moved their standards closer to IFRS –
notably China – to take the final steps towards full IFRS reporting. (The Future of
IFRS, ICAEW Report, p. 2)
Interviews with US respondents revealed that they understood the world’s
disappointment towards US indecision and were not surprised by their emotional nature.
“No. [I don’t blame them for being disappointed- added]. We have to look at this
historically. The US led all this effort. The US was intimately involved in the
creation of the design of the IASB. The US in the sense recognised at the start that
we couldn’t be the world standard-setter. Politically that makes no sense. A
country couldn’t make a standard for the world. We helped support the IASB at the
initial stage. We were the leaders, so having the US slowdown in this decision
making is a surprise.” (FASB Member, Interview 25th September 2013).
“I think it is a matter [of] where you are in the world whether people are
disappointed [or not]. In the US, many people are optimistic about the report
because, I think, as there is an idea of [a] different way to move towards a
common set of global accounting standards than the adoption of IFRS and what is
the continuing role of the FASB. And some people in the US said we should
collaborate and continue to converge with the IASB. Our standards are still
globally high quality.” (FASB Vice chairman, interview 19th September 2013).
All respondents from the US mentioned in the interview that they understand why
the response from the international ‘IFRS Club’ was negative as a positive decision
had been strongly anticipated in 2011. However, some respondents believe that
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international organisations had failed to appreciate the US perspective. Four US
respondents in interview stated that the US has not deserted its commitment to achieve
one set of global accounting standards, but stressed that the mandatory adoption of
IFRS was not the only way to achieve such a goal.
“But that is, that doesn’t mean we still don’t believe that we should enhance the
compliability of the reporting standards over the world and it could be if we would
keep up working and converging, not converting, but converging, that if we
narrowed differences even more, it might be a lot easier for the US to accept.
Because there still are serious major differences.” (FASB Member, interview 25th
September 2013).
Most international disappointment centred around what was perceived as a lack of
political will in the US to pursue its commitment. Although a lack of political will was not
denied by US respondents in the interview, they believed that there were many other
factors influencing the US’ reluctance to make a supportive decision. Table 20 lists some
reasons brought up by five US respondents:
1. Lack of political will Most respondents believed that the political will from
the SEC would be very influential in any future
decision
2. Insufficient demand from the
majority of US companies
Most respondents believed only a handful of US mega
corporations were in favour of IFRS. Most US
companies were comfortable with the current US
GAAP.
3. Insufficient demand from the
majority of US investors
One respondent (a former official of the SEC) was
surprised with the lack of demand for IFRS reporting
from US investors.
4. High compliance cost Most respondents believe that after the financial crisis
and the Sarbanes-Oxley Act, many US companies
were afraid of the high compliance cost in adopting
IFRS.
5. Sovereignty issue Losing control of standard-setting was stated by all
respondents as a critical of the factor, but two
respondents also believe that there would always be
some role for the FASB, for example, in developing
standards for private companies.
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6. IASB governance (funding
and independence)
Respondents doubted the sustainability of the IASB
and also its independence, especially from European
influence.
7. US preference for
competition between
accounting standards
This argument was offered by one prominent US
academic
Table 20. Reasons for the US not adopting IFRS based on US field interviews
In October 2012, the IFRS Foundation staff issued a report to the IFRS Trustees’
(known as the staff’s response report) to address many concerns of the SEC staff report.
The response report, 84-pages long, stated that most US concerns were not unique to the
US but represented common challenges for all jurisdictions in the IFRS adoption process.
While the size of the US economy relative to other jurisdictions presents significant
challenges in transition that are unique to the US, the experience of other countries
suggests that many of the challenges can be overcome with the appropriate political
will to make a commitment to the mission of a single set of global standards. (IFRS-
Foundation, 2012 p.19)
The response report also argued that most of the technical gaps between IFRS and US
GAAP were already included in the IFRS research project and the IASB’s future agenda.
In response to the SEC’s call to work closely with other national standard-setters, the
IFRS Foundation’s report highlighted the plan to establish ASAF (Accounting Standard
Advisory Forum) which would be a formal mechanism for the IASB to work more closely
with other national standard-setters and to end bilateral relationships such as the joint
project with the FASB and the regular meetings with the ASBJ.
The SEC staff report contained a lot of concerns about the IASB’s funding which
according to the US were only drawn from 30 governments and the IASB’s unsuccessful
efforts to secure funding from US governments. The IASB’s staff response report also
rebutted stating that the SEC had failed to note some other arrangements with countries
and the fact that EU funding comes from 27 member countries. According to the IASB’s
staff response, in total there are 69 countries proved funding to the IASB, directly or
indirectly (p.7). IASB’s staff went on the defensive highlighting the fact that the US is
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over represented on the IASB, with 20-25% of seats in the IFRS Foundation’s different
groups and committees occupied by US representatives, despite the amount of the US
financial contribution only accounting for 10% of the IFRS Foundation’s budget.
9.5 Beyond 2012: Will the US eventually adopt IFRS?
Since the IASB’s staff report was issued in October 2012, there has been little
movement on the issue of IFRS adoption in the US. The IASB staff report failed to make
any difference to the US SEC decision to allow or mandate US public companies to use
IFRS. Nevertheless, the FASB continues to have a special bilateral relationship with the
IASB. Notwithstanding the amount of funding by the US government to the IFRS
Foundation and lack of a commitment to adopt IFRS, the US retains its seat on both the
IASB and ASAF, an important advisory forum recently created by the IASB to formalise
the relationship between the IASB and national standard-setters as well as regional
standard-setting organisations.
On various occasions SEC leaders and FASB members have stated their support for
one set of global accounting standards, however, the amount of commitment they have
provided for IFRS has clearly weakened since 2008. Even so, IFRS supporters remain
optimistic that the US will eventually adopt IFRS, as typified by IASB chairman in
numerous public statements:
“It is also important to note that the United States is committed to supporting
global accounting standards. It is SEC policy, it is US government policy, and it is
the policy of the G20, in which the United States is a key player. There are many
practical challenges facing the SEC in making the decision. I don‘t deny that they
are real; however, both I and my counterpart at FASB have made it clear that a
continued program of convergence by another name is not an acceptable way
forward. I do believe that the United States will ultimately come on board. Quite
simply, they need US and we need them.” (Hans Hoogervorst, speech at the Ernst
Young conference on IFRS, 23rd January 2012, Moscow).
Similar optimism however was not shared by some respondents from Canada and the
US who saw the future existence of US GAAP as a significant competitor to IFRS. The
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idea of US GAAP and IFRS co-existing has been proposed by accounting scholars for
quite some time and this might become a formal position of the US as indicated in the
FASB chairman:
“I envision a long-term, global standard-setting environment in which the FASB,
the IASB, and other major capital market standard-setters co-exist and cooperate
with the stated goal of issuing converged standards, while also addressing the
specific needs of the capital markets for which they set standards.” (FASB
Chairman Russel Golden’s, speech to the FASB@40 Conference, New York City,
12th September 2013).
A concern that cooperation between these two standard-setters would cause a lower
quality of accounting standards had been expressed by the former SEC Chairman Mary
Schapiro and also her successor, Mary Jo White. In stressing the need for “different but
equally legitimate financial reporting standards”
“So throughout the SEC, we are cooperating with our foreign counterparts in
ways that unleash the fullest potential of our capital markets to drive economic
growth and create jobs – and to do so in a way that does not lower the bar or relax
the regulatory and oversight standards that protect investors and stabilize
markets.” (Mary Jo White, Speech before ICI General Meeting89, Washington D.C,
1st May 2013 p.5).
IFRS supporters have argued that the SEC would eventually allow IFRS, at least, as an
option for US listed companies, similar to Japan. This was mentioned by Conrad Hewitt
the former SEC chief accountant, during the interview, when noting that there is a demand
for IFRS from at least 30 top companies in the US which have international operations.
The optimism that the US will make IFRS an option for its listed companies was also
mentioned by other US respondents. One respondent for example, expressed that
providing IFRS as an option would help US companies to learn from each other. However
during interviews, current FASB members were not very excited about the idea of optional
IFRS for US listed companies.
89 The speech is available at : http://corpgov.law.harvard.edu/2013/05/10/regulation-in-a-global-
financial-system/ (accessed 26th September 2015)
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“That is a challenging question. I am always sceptical about optional accounting in
general. Because you risk then companies moving, domestically, from one set of
standards to the other based on the analysis which makes them look better.” (Current
FASB member A , Interview 19th September 2013).
“When reconciliation was removed, then there was an idea of an option. But the
feedback that SEC received is: “No”. The SEC has reached the conclusion based on
evidence, that once an option is introduced it will be problematic. An option is not a
viable thing for the US. As soon as an option occurs then there will have to be
adoption. Eventually there has to be adoption.” (Current FASB member B, Interview
25th September 2013).
The SEC may need more time for their companies and investors to embrace IFRS. A
survey by ACCA in 2012 of 493 US-based investors revealed that 45% of respondents
would recommended that companies report under US GAAP and only 30% of respondents
would recommended IFRS. US investors also believed that IFRS disclosure has less
quality than US GAAP with 66% of respondents stating they would avoid companies with
IFRS, and 56% of respondents would put time and effort into reconciling the report
figures to US.GAAP. US investors believed that US companies are prepared for reporting
under IFRS, with only 16% of investors believing that US companies were prepared for
IFRS reporting. Interestingly, however, more than half of investors surveyed (57%)
believe that the SEC will come to require mandatory reporting under IFRS.
In conclusion, US SEC commitment toward IFRS adoption has continuously changed
over the last fifteen years. The golden period for IFRS sentiment in the US 2005-2008 was
influenced by the European IFRS adoption and the pro-IFRS leaders in key strategic
positions in the US regulatory field. The decisions by the US created network effects to
other countries and when the US abandoned their IFRS adoption pathway in 2012, it
received criticisms from the international IFRS supporters.
9.6 Discussion: What can we learned from the US case?
The US is unique compared to other case studies sampled here. The US is the world's
largest economy and its accounting standards are said to be far more complex than those
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of other countries. The country has a very large capital market and, in contrast, to Europe
which was seeking one set of accounting standards to make a fragmented European
market more efficient, the US has arguably less incentive to adopt IFRS. Especially
research findings suggest it is not clear if IFRS would improve the quality of financial
reporting compared to US GAAP (Leuz, 2003; Barth et al., 2012; Lin et al., 2012)
IFRS has been promoted internationally by its supporters as a global high-quality
standard which will reduce the cost of capital, increase the comparability of financial
reports and support global finance. However without another standard to compare it to, it
is arguably very difficult to validate the IASB’s claim that IFRS is a high quality set of
accounting standards. For some, the US is arguably one of the few countries which has the
competence and resources to challenge the quality of IFRS. Indeed the depth of debate
over the relative technical merits of IFRS was evident during the convergence project.
Over the years, as this chapter has demonstrated, the SEC’s opinion on IFRS quality
has appeared to change on a regular basis. During the golden period of IFRS convergence
in the US (2005-2008), the SEC chairman and commissioners reiterated that IFRS is high
quality standard. When the US decided to retreat between 2009 and 2012 from a clear path
towards IFRS adoption, it raised concerns over IFRS quality, supported by various
research findings suggesting that US GAAP financial reports were higher in quality than
those produced according to IFRS. The biggest economy in the world appeared to need
more time and more evidence that IFRS would improve the quality of financial reporting
for them.
The emotional response from the international community over the US indecision in
2011 could suggest that a ‘club-like mentality’, has dominated respective quality
arguments – with the international community’s disappointment being arguably more
visible then the technical counters to the SEC staff’s concerns of IFRS quality.
International organisations, especially in Europe, got close to label the US as a ‘traitor’ to
the club’s goal and its gentlemen’s agreement and commitment to achieve one set of
global accounting standards. In some of their comments, they ridiculed the US and urged
the IASB to ignore the US in the future process of IFRS-making without considering that
it would be a big disadvantage to lose the FASB’s talents and technical competence in
global standard setting. They dismissed the US explanation that achieving one set of
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global standards remains an important goal for the US, not through mandatory IFRS
adoption, but through a slower more natural process of incorporating IFRS into US
GAAP.
The sovereignty issue, that the US does not want to lose its control, was insinuated by
most US respondents. Interestingly, the issue of sovereignty was not discussed strongly by
respondents in other countries, but it is the major issue for the US even since the mid-
1990s as Michael Sutton, former SEC chief of accountant, before the American
Accounting Association annual conference pointed at nearly 20 years ago:
“The sovereignty of national standard-setters and regulators must be respected. It
is likely that the need for national tailoring of accounting and disclosure rules will
continue, and national capital markets must be free to decide the needs of their
investors.” (Sutton, SEC Chief of Accountants, Texas, 17th August1997).
It is not an easy decision for the FASB to relinquish some of its control in standard-
setting to the IASB as a current FASB member observed:
“Right now we have control over our standards. Do we want to move to influence?
Certainly it has less impact than control. Then you have to wonder do you have
significant influence. With the size of the US capital market, we would like to have
influence equal to our size” (Member of FASB, interview 19th September 2013).
The power to control accounting standard-setting arguably is harder to relinquish for
big economies with advanced capital markets such as Japan and the US , thus these two
countries have arguably more to consider formally in adopting IFRS. The stakes are
higher, and once they adopt IFRS there would be no point of return. For countries with
smaller sized capital markets such as Indonesia and Canada, the opportunity to participate
in the IFRS-making arena is an important attractive factor in the choice of IFRS over US
GAAP-and with less potential cost or risk of adoption.
As was discussed in chapter seven, being part of the international society is more
important than debating if US GAAP is superior in quality to IFRS. An opportunity to
influence the IASB through representatives in various committees of IFRS governance, no
matter how small the influence, is better than no influence at all – which would be the case
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in the US GAAP dominated governance system. In the case of the US, it does not have to
adopt IFRS to maintain influence, the size of the US capital market makes it too large to
be ignored by the rest of the world. It is very hard to envision IFRS as an international
standard without the involvement of the US. Moreover, it would be a big loss for the
international effort in global accounting standard-setting to lose FASB talent and technical
resources.
Despite the threat from the international community to ignore the US involvement in
the IFRS-making arena, the FASB sits with the 12 other standard-setters in the ASAF, a
new mechanism established by the IASB (in March 2013) to work more closely with other
national standard-setters following the end of the era of bilateral relationships (with Japan,
the US and other countries). Notably, South Korea and Brazil, for example, despite their
decisions to fully adopt IFRS in 2011 and 2010 respectively, did not win a place at the
ASAF table. The US did even with its non-commitment decision in 2012 regarding the
IFRS adoption.
9.7 Conclusion
The US case study, the last empirical chapter of this study, compliments the other
country case studies in previous chapters. The six countries sampled in this thesis were
grouped based on similarities of institutional arrangements and utilised mechanisms of
IFRS adoption. The countries were also sequenced from countries with minimal
international influence in the IFRS arena, such as the Philippines, to a country with great
influence, the U.S. The sequence of the countries also reflected the resources of national
standard setting bodies, from the country with the least resourced standard-setter, the
Philippines, to the country with the most resourced standard-setter, the US.
The US case demonstrates that despite the effort of pro-IFRS actors to institutionalise
IFRS in their jurisdictions, the outcome may not be easy to predict. The decision of IFRS
adoption can be reversed depending on the outcome of ongoing battle between various
actors pursuing different types of institutional work. By focusing on the adoption
processes and not necessarily on the outcomes of such institutional work, this study
provides a richer explanation of why a country chose different mechanisms of pursuing
the goal of ‘one set of global accounting standards’.
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The next chapter is a discussion chapter which provides an overall analysis and
assessment of the IFRS adoption process across the six sampled countries and what has
been learned regarding the decision-making processes of IFRS adoption activities
(institutional works), the national actors and the arguments. In particular, the chapter
focused on the characteristics and relationships between different forms of institutional
works, the encompassed activities of key agents/actors and the range of arguments utilized
in promoting and/or resisting case for IFRS adoption.
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Chapter 10. The Institutional Work of IFRS Adoption: Transforming
Accounting Regulatory Fields
10.1 Introduction
Studies of international accounting standardisation mostly discuss the political
interplay between various international actors (see Camfferman and Zeff, 2007; Botzem,
2012; Botzem and Quack, 2006) but rarely discuss the interactions between individual
countries and the international field or the interactions between national key actors in their
own regulatory field. We know very little about the actual processes of local reception and
mechanisms of diffusion (Djelic and Sahlin-Andersson, 2006). This thesis has tried to fill
the gap, by analysing the process of IFRS adoption in various jurisdictions where they
could have chosen a competing set of standards in the form of US GAAP, to enhance our
understanding of how IFRS has been diffused and institutionalised to become a set of
global standards.
Institutions are social structures that are characterised by a high degree of resilience
(Scott, 2008). However, it has also been argued that social structures are dynamic and
continually evolving and they are a matrix constituting the outcome of a process of social
interactions between actors (Giddens, 1984; Sewell Jr, 1992; Burns and Scapens, 2000).
The national regulatory fields as the institutions under study have gone through
institutional change in the process of contemplating IFRS. Instead of looking at the
adoption process as a linear chain of events, this thesis proposes to see the adoption
process as a dynamic continuous process between actors with varied interests performing
different forms of institutional work. This chapter analyses numerous competing factors
and collective influences during the four stages of IFRS adoption: Harmonisation,
Decision, Transition and Implementation.
This chapter aims to build a new analytical framework to study the IFRS adoption
process at the national field level. In framing the process of IFRS adoption, this thesis has
used the notion of institutional work (Lawrence et al., 2009; Lawrence and Suddaby,
2006) which is a recent development in the sphere of institutional theory. This chapter
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draws on the utilisation of institutional work to propose an analytical framework better
capable of identifying, understanding and appreciating the sensitivities and dynamics of
the adoption of a global set of standards in various national contexts.
Some literature on the IFRS adoption process has utilised the Dillard et al., (2004)
model, to analyse institutional change in three hierarchical levels of social systems of a
single country, for example, in case studies of Portugal (Guerreiro et al., 2015) and the
United Arab Emirates (Irvine, 2008). The Dillard et.al. (2004) model draws on Weber’s
(1968) notions of social context which proposed that the institutionalisation proceeds
occurs in a recursive manner through a social system with three hierarchical levels: the
economic and political level (global level), the organisational field level and the
organisational level. However, often the users of this model found evidence that the
coercive pressure from the economic and political level cascaded to the organisational
level but found very little evidence of the reverse pressure from the organisational level
upward to the economic and political level (e.g Irvine, 2008; Guerreiro et al., 2015).
Although the Dillard et.al (2004) model can be useful in the analysis of the social and
political context of the IFRS adoption process in individual countries, this model is not
that useful for cases comprising multiple fields, as is the case with this thesis. The Dillard
et.al (2004) model requires clear boundaries between each of the levels, while the analysis
of this thesis has demonstrated that the boundaries between the three levels are less
obvious in some sampled countries compared to the others. For example the accounting
standard-setters in Japan, Canada and the US are important actors in the IFRS global arena
and very much more influential than the standard setting bodies of the Philippines and
Indonesia. Any decision on IFRS adoption by the US FASB cannot be viewed in isolation
as a decision of an individual organisation as it clearly brings with it significant
consequences for the IFRS international arena. The segmented, and potentially rather
static nature of the Dillard et al model is accordingly not that helpful in
assessing/analysing the complex interactive between national, regional and global
regulatory fields – that as we have seen in this thesis are increasingly connected.
Regulatory fields are capable of being transformed when IFRS is adopted. National
regulatory fields consist of several actors such as the accounting standard-setter, the
capital market regulator, the accounting profession, and the preparers of financial reports.
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The framework proposed by this chapter explicitly acknowledges the interconnection
between national and international actors. As was discussed in the empirical chapters,
decisions by national actors were very much influenced by the persuasion and assistance
from international actors. The international influence over national actors has also been
highlighted in the existing literature on IFRS adoption in single country (Mir and
Rahaman, 2005; Tyrrall et al., 2007; Albu et al., 2011; Albu et al., 2013). However the
great value of studying IFRS in multiple countries is that it allows the observance of
similar institutional work across different fields in response to such international
influence, which may produce different institutional outcome.
The next section will explain the analytical framework of the IFRS adoption process
in more detail which will be followed by a discussion of three types of institutional work
involved in the process: disrupting, maintaining and creating work, where each type is
evolving in its form throughout the processual stages of IFRS adoption. The last section
will discuss the possible new battlefields beyond the IFRS implementation stage.
10.2 Theorising the IFRS adoption process: the dynamics of institutional work
Drawing on the empirics previously presented in this thesis, the main aim of this
chapter is to develop theorization of the IFRS adoption process at the national regulatory
field level by drawing from and refining the theory of institutional change and institutional
work (Lawrence et al., 2013; Lawrence and Suddaby, 2006; Lawrence et al., 2009). The
analytical framework presented in Figure 6 proposes an explanation for the process of
IFRS adoption at the national regulatory field level. It highlights the two-way connectivity
between the international and national regulatory fields. As being sampled throughout the
empirical chapters, the debate between actors at the national level (accounting standard-
setters) was highly influenced by the dynamic at the global level and vice versa.
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Harmonisation Decision Transition Implementation
Figure 6. The Institutionalisation of IFRS
Outcome
Institutional
Work.- (D) = disrupting work; (C) = creating work; (M) = maintaining work.
Stages
National Regulatory Field
New Battlefields
Confirming the decision
Decision to adopt
Refining the decision
Reversing the decision or creating new decision
Full adoption Revisited
Engaging with regional group standard setter
Implementation technical challenges
Undermining localism logic (D)
Image making (C)
Reconfiguring Belief System (C)
Disrupting full adoption (D)
Prohibiting old standard (D)
Creating competition logic (C)
Resisting new (maintaining old) Standard (M)
Reinvented old actors (M)
Maintaining full adoption (M)
International Regulatory Field
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The arrows at the top of the Figure 6 symbolise clear two-way connections between
the international and national regulatory fields, although the empirical findings of this
study indicate that such connections are less obvious across countries. Some institutions
are influential players in both national and international fields such as the US FASB while
other institutions are only influential at the national arena with weak influence in the
international regulatory field such as FRSC of the Philippines. Certain individuals often
plays pivotal role in both fields. For example, IASB members often lend their influence to
the national regulatory fields during the decision period. For example in the developing
sample countries of this study, IASB chairman came to the countries during the decision
period to promote the adoption of IFRS90. Some individuals have also been moving from
international field to the national spreading with them the ‘globalism’ logic to the national
fields. Former IASB member have also been appointed to chair the local national
standard-setters91 and vice versa; many key actors in the international arena are individuals
with previous strong influence for IFRS adoption in the national arena92.
This thesis argues that the adoption of IFRS is a process of transforming the national
accounting regulatory field through a series of developmental of processual stages (as
detailed in the top line of Figure 6). Some countries may have gone through the four
stages (harmonisation, decision, transition and implementation) in a relatively short period
of time such as the case of the Philippines, but another country like the US may never
reach the IFRS implementation stage as it has chosen a different pathway in supporting
the goal of achieving one global accounting standard. The middle layer indicates type of
institutional work undertaken by actors during different stages. The detail of each types of
institutional work will be discussed further in this chapter.
90 The visits of IASB members to various countries that were interested in adopting IFRS were
highlighted in IFRS Foundation annual reports, e.g at para.85 page 16 of 2005 Annual Report:
http://www.IFRS.org/About-us/IFRS-Foundation/Oversight /Annual-
reports/Documents/10_845_IASCF2005AnnualReports.pdf (Accessed 10th September 2015) 91 e.g. The case of Robert Herz (US FASB), Ikuo Nishikawa (ASBJ), and Patricia O’Malley (ASC
Canada) had experienced in serving IASC/IASB before their appointment to lead their national accounting
standard-setting body. 92 e.g the case of Amaro Gomez (Brazil), Paul Cherry (Canada), and Ahmadi Hadibroto (Indonesia)
who respectively became IASB Member, Chairman of the IFRS Advisory Council and IFAC council
member after their pivotal role for IFRS adoption decision in their respective countries.
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The framework argues that the regulatory field continues to change, even after IFRS
is implemented. Thus in understanding the model, although for writing clarity the model
suggests four sequential stages of IFRS adoption, the whole process is a dynamic where
the outcome may vary between countries depending on the strength of institutional
processes and whether it is possible for different stages to be revisited (as prior decisions
get overturned). As the figure suggested, after the decision to adopt IFRS, national actors
may refine the decision which may result the confirmation of the adoption such as the case
of Canada or reversing the initial decision such as the case of Japan.
The battle between actors with different interests continues even after the outcome has
been reached as illustrated in the box of New Battlefields. National actors may revisit the
plan of full IFRS adoption and switch to the convergence process as, for example, in the
case of Indonesia. After the IFRS implementation, some countries may also permit non
listed companies to opt out from IFRS and switch to IFRS for SME or local GAAP as in
exemplified by the case of the Philippine. The debate may also escalate beyond the
national field as the national standard-setters were engaged with other standard-setters in
their regions and established a regional group of standard-setters. This emergence of a
regional group of standard-setters such as AOSSG and their potential impact to the
international standard-setting will be discussed further in this chapter. The technical
accounting debate may also become stronger in the early years of IFRS implementation as
preparers start to realise that some standards would be too onerous to apply. The lobby
from the preparers may force the national standard-setters to delay some specific
accounting standards.
The concept of institutional work coined by Lawrence and Suddaby (2006) used in the
framework provides a conceptual umbrella to categorise the action of actors throughout
the stages. Lawrence and Suddaby (2006) offered new vocabularies categorising the
efforts exerted by organisations as well as individuals within the organisations into three
types: creating, maintaining and disrupting institutions which offered new tools for further
analysis. Institutional work theory captures both agency and structure and their
interrelations by focus on social action (Zilber, 2013). The notion of institutional work
highlights reflexive forms of actions that are aimed at intentionally affecting institutions
(Lawrence and Suddaby, 2006; Lawrence et al., 2009). While institutional work theory has
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been useful to categorise actions by actors affecting the institutions, the framework
illustrated in Figure 6 allows the observance of institutional work interconnection and
evolution over time.
Most of the existing literature on institutional change at field level focuses on single
institutional processes, for example, repair work as part of maintenance (Micelotta and
Washington, 2013) or creating work resulting in new professional space (Suddaby and
Viale, 2011; Covaleski et al., 2003). The use of institutional work theory encourages
researchers to develop more integrative models of institutional dynamics and identify the
impact of particular types of institutional work for a particular outcome. For example, the
2010 study by (Zietsma and Lawrence, 2010) explored institutional change and stability at
organisational field level, i.e the coastal forest industry in British Columbia. The authors
divided the evolution of the industry into four stages: institutional stability, institutional
conflict, institutional innovation and institutional restabilisation. Zietsma and Lawrence
(2010) associated certain types of institutional work with each of the stages, for example,
in the institutional stability stage, actors were involved in maintaining work, while
creating practices are linked to the institutional innovation stage.
Similar to other case studies on institutional change at industrial field level (Zietsma
and Lawrence, 2010; Zietsma and McKnight, 2009), this research also finds that multiple
types of institutional work (instead of one type) were exerted by various actors with
different interests. However, in contrast with Zietsma and Lawrence (2010), the analysis
of this study finds a less deterministic relationship between certain types of institutional
work with a particular stage in the field’s change. For example the creating work
discussed in this study, to promote IFRS in a field, does not necessarily lead to the IFRS
adoption (e.g the case of the US). Disrupting work, to eliminate old standards also does
not necessarily lead to the elimination of old standards (e.g. the case of Japan). Although
this study finds evidence of various types of maintaining work after IFRS is implemented
(continue its usage), it also finds that the maintaining effect or condition may be less
stable than suggested by such labelling as the disrupting and the creating work continues
to destabilise the field.
In essence, IFRS adoption represents a battlefield between those who want to fully
adopt IFRS and those who want to maintain the status quo. As such, the competition of
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ideas exists at every stage, albeit in some countries it is more visible than in others. The
process to reach the decision to adopt IFRS involves various forms of disrupting, creating
and maintaining institutional work. Actors can disrupt the old set of accounting standards
while simultaneously promoting IFRS. At the same time actors promoting IFRS, face
resistance from the actors aiming to preserve the status quo of maintaining the old belief
system which underpinned the ‘old’ set of accounting standards. The interaction between
disrupting and maintaining institutional work creates a tension in a field where both actors
try to persuade the other. In many cases, the tensions among different actors may compel
the standard-setter to amend their initial plan for example by switching from full adoption
to convergence as in the case of Indonesia (see p. 166).
As such, a key contribution of this thesis is to demonstrate that institutional work and
argues that certain types of institutional work are not necessarily linked to particular
institutional outcomes. Despite all national actors claiming to support one global
accounting standard, institutional outcomes vary across sample countries depending on the
mechanism of adoption and the power struggle between actors. Sometimes the actors
were very successful in attacking old institutions which resulted in the old standards
ceasing to exist. In other cases, the preserving work was stronger which made the
institutional disruptive work less successful. Due to the ongoing contestation in the fields
among actors with different interests, it is possible for a new consensus may cause
countries to revise their initial decision to fully adopt IFRS. Jurisdictions may choose to
adopt IFRS or not adopt it or instead allow it as one of the standards available for certain
types of companies.
The remaining sections of this chapter will discuss each type of institutional work and
how they have evolved into varied forms over different stages. The framework in Figure 6
suggests that new battlefields may emerge in a field during and after the implementation
stage, leading to the new transformations. The last section of the chapter will discuss the
example of new battlefields and some institutional consequences from the IFRS adoption
process beyond the implementation stage.
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10.3 Disrupting institutional work
Disrupting institutional involves attacking or undermining the current mechanisms
that lead members to comply with institutions (Lawrence and Suddaby, 2006). Figure 6
illustrates that disrupting institutional work is exerted at every stage of the adoption
process. Depending on the stage of adoption, disrupting work can take different forms. For
example, at an early stage when a country is deciding to adopt IFRS, the disrupting
institutional work involves attacking or undermining the belief system underlying of the
old set of accounting standards. At the later stage, when IFRS has been adopted, the
disrupting institutional work is transformed into questioning whether IFRS is fit for all
types of entities in the country.
Lawrence and Suddaby (2006) drew their theorising of disrupting institutional work
very much from Oliver (1992) notion of deinstitutionalisation which is a distinct process
and not necessarily relate to the creation of new institutions. Although it is easier to
assume that disrupting the old standard in the national regulatory field is through the
introduction of the new accounting standard, the analysis of this study argues two types of
institutional work are distinct although both can be on-going at the same time. The two
sub sections below will discuss how disruptive work may take different forms depending
on the stage of adoption.
10.3.1 Undermining the ‘localism’ logic of the old accounting standard
Prior to IFRS adoption, most of the countries sampled in this thesis developed their
own accounting standards which were highly referenced to US GAAP. The adoption of
IFRS was not only involved promoting the IASB’s set of standards, but also involved
convincing national stakeholders that adopting such a set of ‘international’ accounting
standards was better than developing existing ‘local’ accounting standards. The IFRS
supporters needed to disrupt the practice of developing local accounting standards. Some
countries chose to disrupt or demolish the old practice by issuing an accounting law and
stipulating that IFRS should be adopted. In other countries, pro-IFRS actors relied more
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on debate and persuasive lobbying to undermine the localism logic of national accounting
standard-setting.
Two of the sampled studies in this thesis, Brazil and the Philippines disrupted the
existing accounting standard by incorporating IFRS within their respective new
accounting law. The enactment of a law as disrupting work to the existing practice is
similar to the institutional work discussed by other scholars (Jones, 2001; Leblebici et al.,
1991). The enactment of a law in support of IFRS adoption, was an important institutional
work for countries with weak standard-setters such as the Philippines and Brazil. As was
discussed in chapter six, the law serves as fait accompli for all stakeholders and made the
IFRS adoption process less contested in these two countries.
It is interesting to note that the Philippines and Brazil took the same approach to
legitimise the decision to adopt IFRS despite the former being a common law country and
the later being a code law country. Traditionally, the legal system has been one of the
main reasons for accounting diversity mentioned by international accounting literature
(Doupnik and Perera, 2007; Radebaugh et al., 2006; Nobes, 1983). However, in most of
the countries such as in Indonesia and Canada, the decision to adopt IFRS did not have
strong legal support thus most of the actors relied more on negotiations, persuasions and
lobbying to undermine the assumptions and beliefs in the old accounting standard and
simultaneously promoted IFRS.
Before the adoption of IFRS the national regulatory fields were running under the
‘localism’ logic where the accounting standard should be created based on the interests of
national stakeholders. As was discussed in the empirical chapters, during the
harmonisation stage, most sample countries developed their own accounting standards
although they might also take IAS and US GAAP as their reference. The presumption was
that accounting standards should be unique, thus the pro-IFRS actors undermined this
basic assumption and argued accounting standards should be created at the international
level instead. Developing local accounting standards was labelled as ‘not modern’ and
against the globalisation. Concurrently the pro-IFRS actors introduce IFRS to their field as
a set of international standards endorsed by international bodies. The actions and type of
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arguments used by actors in introducing IFRS to the field will be discussed in more detail
at the section of ‘creating institutional work’.
Adopting IFRS was also suggested by actors as a more efficient way over creating
their own unique set of accounting standards. A common comment which came up from
respondents was ‘why do we have to reinvent the wheel’. Respondents also commented
that the due process of the IASB is very thorough resulting in possibly a better standard
than that produced by other standard-setter with limited resources. With such arguments
pro-IFRS actors tried to suggest that standard-setting is an expensive exercise which
countries may not have enough resources to carry it out well.
10.3.2 Disrupting the full adoption of IFRS
The IASB has always encouraged full adoption of IFRS which involves the adoption
of IFRS as identical word-for-word versions of the original without modifications or
exceptions (known as ‘carve outs93‘) applicable to all industries. This had been the aim of
most sampled countries when they decided to consider IFRS adoption. However, during
the transition period, the aim of full adoption was disrupted which made countries revising
their initial plan. In the extreme case of Japan, for example, the disruptive institutional
work performed by Japanese large corporations successfully lobbied the Japanese FSA to
completely abandon the IFRS adoption blueprint and continue with the status quo. In the
case of Indonesia, while full adoption was the initial aim, this was reduced to
‘convergence’, with Indonesian standards being converged with IFRS but not identical.
Right up until April 2015, Indonesia has continued to refuse to admit that they had fully
adopted IFRS in any survey issued by the IASB (see Pacter, 2015 for summary of the
survey).
During the transition stage of a country, the standard-setter as well as the preparers
started to examine each of the standards more closely. Some contradictions between newly
adopted standards and existing standards (or company’s law) were mostly identified
93 Full adoption without carve-outs had been advised in many public speaking enggements by the
former IASB chairman David Tweedie during his leadership period. See for example was address during the
World Congress of Accountants 2010 in Kuala Lumpur : http://www.theaccountant-online.com/news/wcoa-
carve-outs-will-blow-up-IFRS-tweedie
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during the transition period. Lobbying from preparers was intensified during this stage
asking for further considerations, which compelled the standard-setter to review their
commitment to full IFRS adoption. Lobbying efforts from some specific industries
resulted in adding on more transition years, as in the case of the insurance and rate
regulated industries in Canada. In other countries, the standard-setters might just dismiss
the preparer’s objection and carried on with their initial plan of full adoption, even though
this would result in an undesired impact for preparers. For example in Brazil a significant
amount of rate regulated assets which could not recognised under IFRS were written off in
2010 when the country applied IFRS for the first time (see p. 127). Canada experienced a
similar problem as Brazil and decided to delay the adoption year for rate regulated
companies while lobbying the IASB to issue a new standard, which subsequently resulted
in IFRS 14 Regulatory Deferral Accounts (see p. 152).
The year before the implementation stage was a critical issue and time period for the
standard-setter who had either to continue carrying on with the adoption plan or revise it.
This is the period when preparers usually realised that some standards would be onerous
to apply. Financial statements based on IFRS require comparative figure for the year prior
to adoption year which would force companies to apply IFRS one year before the target
year to produce such figures. Thus one year before the implementation year, the anxiety
increased among users. In various degrees, standard-setters were lobbied by preparers to
delay the adoption year. Such lobbying could result in stopping the full adoption plan as
was the case with Japan or just delaying several specific standards such as those relating to
financial instruments from the adoption process as was the case with Indonesia. Even for
the country which experienced a relatively smooth and fast transition like the Philippines,
a few days before the IFRS implementation date, an interviewee acknowledged some
anxiety among preparers who tried to lobby the regulator to delay the implementation
date.
As was discussed in the empirical chapters, much relief was provided during the
transition period to absorb the shock of companies adjusting their reporting systems from
one set of standards to the other. The most common way was to exclude the problematic
standard or industry at the implementation year (see
Table 21 below).
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Countries Transition Relief at the Implementation Year
Philippines IFRIC 15 Agreements for the Construction of Real Estate
deferred to 2012. And some other transition relief for IAS 19, IFRS 7
and IAS 39
Brazil Eliminated the revaluation model option for PPE and Intangible
assets. Pushed for the equity method to be used for separate financial
statement while IFRS only allows the fair value or cost model.
Canada Mandatory adoption of IFRS for investment companies and
segregated accounts of life insurance enterprises until 2014 and for
entities with rate-regulated activities until 2015
Indonesia IAS 41 Agriculture and IFRIC 15 were not adopted. IFRS 4
Insurance Contracts was deferred to 2013 to provide more time for
the transition process to insurance companies. Some non-IFRS
standards are still effective.
Table 21. Transition relief and ‘carve outs’ undertaken by sampled countries
Source: Various documents issued by the standard-setters.
The disruptive institutional work did not stop even after IFRS implementation. Some
countries after a few years of full IFRS adoption, changed their initial plan. For example,
the decision to require mandatory use of IFRS in 2005 for all entities in the Philippines,
including non-listed companies, created dissatisfaction among preparers which resulted in
the ‘IFRS for SMEs’ being ‘eagerly’ adopted in 200994. Other countries in Europe, such as
Croatia (Mošnja-Škare, 2010) and Malta (Alexander and Micallef, 2011), which adopted
IFRS in full also found it inapplicable for small and medium-sized companies, resulting in
their national accounting standards being allowed as an option for their SMEs.
10.3.3 Prohibiting the continued use of old standards.
Another disrupting work was identified during the transition stage in Japan and
Canada. US GAAP has been one of the options for qualified listed companies in Japan
94 Interview with the Executive Director of PICPA on 1st December 2012
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since 1976 (van Mourik, 2007) and in Canada since 200495. Upon the decision to adopt
IFRS, the market regulator tried to prohibit the use of US GAAP. Allowing more
standards in the capital markets would increase the supervisory cost of the regulator to
ensure the compliance. The decision to prohibit US GAAP in Japan by 2016 was issued
by JFSA in December 200996 while Canadian market regulator in 2008 issued a concept
paper that prohibiting the US GAAP use by 201397.
However, both regulators received a strong objection from the stakeholders, especially
from companies dual listed in the US market. These objection forced market regulators to
rescind their plan and continue to allow US GAAP as an option. The argument of US
GAAP supporters in maintaining US GAAP use in their jurisdictions will be discussed in
section 10.5.1 of this chapter. Until now US GAAP remains as an option in Japan and
Canada and the interview with senior officers of JFSA and CSA revealed that they did not
see any urgent need to overturn the decision in the near future.
10.4 Creating institutional work
As discussed in previous sections, disrupting institutional work has focused on
undermining the logic of old accounting standards. Simultaneously with such disrupting
work, pro-IFRS actors were engaged in an institutional creating work to assist with the
introduction of IFRS in their national regulatory field. Such creating institutional work
involved promoting IFRS as a high quality global standard and the reconfiguration of the
belief system from ‘localism’ logic to ‘globalism’.
During the decision stage of the process, the creating institutional work saw actors in
the sampled countries being heavily involved in advocacy activities or the mobilisation of
political and regulatory support through direct and deliberate techniques of social
persuasion. The case of Indonesia is one example of how a few key individuals promoted
95 Document of National Instruments 52-107. 96 Revised Cabinet Office Ordinances of JFSA can be downloaded at:
http://www.fsa.go.jp/en/news/2009/20091211-8.html (accessed 11th September 2015) 97 The concept paper no.52-402 is available from this link
http://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20080215_52-402_cp-fin-rpt.jsp, accessed 9th September
2014.
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IFRS and mobilised political and regulatory support from the government for the
adoption.
The creation of the image of IFRS as a high quality accounting standard was a crucial
tool used by the IFRS supporters to convince doubtful actors in their field. High quality
has been an alleged characteristic of IFRS as a set of global accounting standards
promoted by the IASB to the rest of the world. Countries were persuaded to adopt IFRS
and abandon their local standards by the argument that IFRS would reduce the cost of
capital, improve transparency and comparability of the financial report, which then
facilitates international capital movement.
10.4.1 IFRS as a high quality accounting standard: Image-making processes
IFRS proponents implied that IFRS is a set of good quality standards as more and
more countries adopted it and more international bodies endorsed it. However, as was
discussed in the second chapter of this thesis the early adopters of IFRS such as the EU
had a leap of faith in adopting IFRS more for political reasons rather than for quality. The
EU decision then encouraged other early adopters to make similar decisions around the
same year (e.g. Australia, Hong Kong and the Philippines). As more countries adopted
IFRS it created a network effect (Ramanna and Sletten, 2009) which appealed to other
countries to adopt it as well. The high quality image which surrounds IFRS is enhanced as
more countries joining the ‘IFRS Club’ meaning more legitimacy for the standard’s claim
to good quality. IFRS became a catchword for modern trade and globalisation. This
created a momentum of adoption and late adopting countries were compelled to adopt
IFRS because the exclusion from the ‘IFRS Club’ would bring more disadvantages than
advantages. Figure 7 below illustrates the cycle in the making of an image of quality.
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Figure 7. The cycle of IFRS image-making
However, the concept of high quality international standard is more complicated than
the network benefit of the standard over the alternative. Most of the respondents in this
study affirmed that IFRS is good quality standard but struggled to explain what they
meant by ‘good quality’. During the interview, many respondents referred to the IASB’s
due process prior to setting a standard as the main contributor to the quality of IFRS. They
argued that the rigorous nature of the due process involved in developing IFRS (e.g.
technical research and many forms of stakeholder outreach) was a very important factor
contributing to the quality of IFRS. However, respondents found it difficult to repudiate
the fact that the FASB also follows a rigorous due process in developing US GAAP. For
example, one of the IFRS proponents admitted that the FASB’s due process may be better
than the IASB’s.
IFRS proponents in developed countries such as Canada and Japan wielded another
argument which tried to distinguish the FASB and IASB due process. The IASB’s is more
appealing for developed countries, as it allows them to get involved while the FASB
cannot entertain non-US needs. An opportunity to influence the IASB through the
representatives on various committees of IFRS governance, no matter how small the
The IASB makes claims that IFRS is a set of high quality global accounting
standards.
Early adopters, such as the Philippines and Europe,
adopt for reasons other than quality
Late adopters such as Canada, Brazil and Indonesia, see the
widespread adoption of IFRS as evidence of the high quality of
IFRS.
As more countries adopt, the image of high quality is
enhanced and IFRS becomes more international
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influence, is better than having no influence at all. Hence, even though respondents mostly
agreed that the IASB and FASB both have a rigorous due process, the IFRS proponents
tried to imply that these processes were inherently different and therefore the comparisons
were invalid. One has a due process involving stakeholders in one country and the other
has an international system of due process involving hundreds of countries. The
international due process provides the opportunity for stakeholders in several countries to
participate.
The IFRS proponents argued that it is a better option as it provides opportunities for
the adopting countries to influence the due process. This is an argument which is difficult
to rebut, as the FASB is required to develop accounting standards which cater to US
need(s) only and not those of the rest of the world. If adopting a set of international
standards is a better option than developing national specific standards, then IFRS should
be chosen instead of US GAAP as it provides more room for lobbying in its due process.
When the US bailed out from their IFRS convergence plan in 2012, the cycle started to
unravel. As was discussed in chapters eight and nine, the indecisiveness of the US about
IFRS adoption around 2011 and 2012, encouraged other countries to slow down their own
adoption processes (as in the case of Japan). Sovereignty as a reason for not adopting
IFRS is more of an overriding factor than an issue related to the quality of IFRS. Many
pro-IFRS respondents to this study argued that the US would eventually adopt IFRS in the
future, however, many respondents especially from the US and Japan were less
enthusiastic about this prospect.
These developments in the US have made the path towards a single set of global
standards become uncertain. This uncertainty has given countries such as Japan and China
the confidence to maintain their own national standards (Camfferman and Zeff, 2015
p.526-527) and other countries have reassessed their commitment to full IFRS adoption.
Indonesia for example, at the moment also maintained its ‘convergence’ strategy with
IFRS by avoiding full adoption and refusing to set a target year for full IFRS adoption.
Since 2012, the idea of a few different global accounting sets of standards with similar
quality continues to pose a threat to the IFRS ‘quality-making’ cycle.
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10.4.2 Reconfiguration of belief systems
The second group of forms of institutional work in creating institutions emphasises
actions in which the actor’s belief systems are reconfigured. Lawrence and Suddaby
(2006) has provided three forms as examples: Constructing identities, changing normative
associations and constructing normative networks. In the sampled countries, the belief
systems of the standard-setting bodies are often reconfigured. New standard-setters were
established with the new belief system of producing principles-based accounting
standards. In other examples, the head of an accounting standard-setting body who did not
support the belief system of ‘one global accounting standard’ was replaced by another
leader.
The actors institutionalised IFRS in their national regulatory field by promoting IFRS
attributes. Firstly, the IFRS proponents used the classic economic rhetoric involving the
benefits of IFRS adoption such as reducing the cost of capital and increasing
comparability. This economic rhetoric was widely used by international actors and also
national actors in persuading their opponents. Although, one may argue that any standard,
if it is applied consistently across countries may achieve those benefits as well, even if it is
US GAAP or Japanese GAAP. It is not clear why the country should adopt IFRS if other
standards would, arguably, achieve similar goals if it was to be applied globally. Thus, the
IFRS proponents needed other arguments to convince them it should be IFRS and not the
other international standards such as US GAAP.
Secondly, IFRS proponents used the popular argument that IFRS has been adopted by
more than one hundred countries, thus it is (becoming) a set of truly international
standards. This argument can be found in many documents and many speeches, by IASB
officials speaking in the sampled countries, or by the local actors. The proponents of IFRS
tried to use this argument to illustrate the ‘globalism’ of IFRS. Nevertheless, this argument
often neglected the fact that many jurisdictions have local IFRS modifications.
The IFRS proponents argued that the country was part of a global economic system,
and a member of international bodies which recommended the use of IFRS such as the
IFAC, the World Bank, IMF, G20 and IOSCO. Membership of those organisations
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included a requirement to adopt IFRS. Using this argument, pro-IFRS actors argued that
adoption was inevitable if the country wanted to remain as part of the global society.
Adopting IFRS was a better option than being alienated from the rest of the world.
Purporting to support the idea of one set of global standards could have been more
feasible for certain countries than full scale IFRS adoption. For example, the questions on
a 2013 IFRS Foundation survey investigating the use of IFRS around the world were very
revealing. Responses from 138 jurisdictions were received and the results were
subsequently published on the IFRS Foundation website98. It is interesting to note that the
first question to the survey was not whether the country had adopted IFRS but instead
whether the jurisdiction had made a public commitment in support of moving towards a
single set of high quality global accounting standards. A hundred and twenty-eight
jurisdictions including the US and Japan answered ‘yes’ to this question. From the
structure of the survey’s questions, it is very clear that the IFRS Foundation was seeking
confirmation from the national actors that they supported the ‘idea’ first before being
committed to IFRS. Even jurisdictions that are often mentioned as ‘non-IFRS adopters’99
such as the US, Japan, India and China, all answered ‘yes’ to that question. The responses
to this survey demonstrate that globalism logic wins over localism logic in the
international arena of accounting standard-setting.
The logic which governed the national regulatory fields was therefore transformed,
following IFRS adoption, from that of ‘localism’ to ‘globalism’. Actors in the field
changed the perspective of themselves from having mere local influence to being part of
something bigger -- the international society of IFRS. Often this ‘transformation’ was
communicated to the international bodies (mentioned above). Sampled countries made
efforts to communicate their adoption progress to the international bodies in order to be
acknowledged as good global citizens. The previous empirical chapters especially the case
study of Japan demonstrate that the decision to adopt IFRS was hugely influenced by the
EU assessment which found Japanese GAAP incompatible with IFRS and US GAAP.
Thus the ASBJ convergence project plan in 2006 and the Tokyo Agreement in 2007
98 All jurisdiction’s filled survey is available in : http://www.IFRS.org/Use-around-the-
world/Pages/Jurisdiction-profiles.aspx, accessed 12th November 2014
99 The four countries were mentioned in the IFRS Foundation chairman’s speech on November 2014 in
Tokyo as countries which are not yet required IFRS. The ful speech is available at
http://www.IFRS.org/Alerts/Conference/Documents/2014/Speech-Michel-Prada-Tokyo-November-2014.pdf
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served as an important negotiation tool for Japan to negotiate with the CESR. The IFRS
convergence plan in Indonesia was also used by the standard-setter to negotiate with the
World Bank assessor to improve the ROSC assessment of the slow IFRS convergence
process in Indonesia.
By adopting IFRS, the national standard-setters also reconfigured their role and
identity. The changing role of national standard-setters for example is reflected in the 2014
document of “A Model for National Standard-setters”100 issued by IFASS and IASB. The
document envisions the ideal form of national standard-setters which highlights the
qualitative characteristics of independence and technical competence. The document
prescribing an ideal model for National standard-setters implies that it is not enough for
the countries to adopt IFRS, but they should adopt the ideal due process and the
institutional arrangement of the standard-setter as well.
[…] The Model is written primarily for NSSs in jurisdictions that are committed to
the adoption of IFRS for publicly accountable entities (see para 1.9 below).
However, it is also intended to be useful for NSSs in jurisdictions that have not yet
committed to adopting IFRS or have standard-setting authority that extends to
entities that are not currently addressed by the IASB. Furthermore, it might be
useful for other bodies involved in the standard-setting process, such as bodies
that monitor, funds or oversee NSSs, or bodies that assess IFRS for adoption in
their jurisdiction for the purposes of making recommendations to the legislature.
(A Model of National Standard-setters”, para 1.4.).
The model proposed by the IASB highlights the importance of certain qualitative
characteristics of national standard-setters. These include independence, technical
competence, effectiveness, efficiency and their role as acting in the public interest. The
model also suggested that the national standard-setting bodies should have robust
transparent due process and an oversight body. The model fits very well with accounting
standard-setters in many developed countries such as the UK, US, Japan, Korea and the
IASB itself.
100 The genesis of this document came from a position paper by Australian Accounting Standard Board
in IFASS meeting in 2009.
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10.4.3 The creation of competition logic
As was discussed in the previous section, the disruptive work may fail to eliminate the
old institution from a regulatory field which then results in the old and new system
competing in the same field. An important institutional work observed in Japan in 2013
was the creation of market competition for accounting standards. Japan was under a lot of
pressure from the international community to show more commitment towards IFRS
adoption, especially after Masamichi Kono chaired the IFRS monitoring board in 2009.
Demonstrating their intention to support IFRS while agreeing to the requests of Japanese
GAAP and US GAAP users, Japan conceded IFRS for non-listed companies and
introduced Japanese international modified standards (JMIS). With this decision, Japan
created a level playing field for IFRS, JMIS, Japanese GAAP and US GAAP in their
market.
In 2007 the US created market competition for their foreign registrants by allowing
the use of IFRS. Foreign registrants in the US have the option to choose between IFRS,
US GAAP and their local GAAP with reconciliation to US GAAP. Some previous
research and also the findings of this study show that IFRS does not always win in the
competitive environment against US GAAP, nor against local GAAP. IFRS as an option
for US domestic issuers is not yet available, however many respondents from the US
argued that this is a high probability in the US in the future.
Although the idea of ‘few global accounting standards’ has been enunciated by many
accounting scholars (Sunder, 2002; Sunder, 2011; Walker, 2010; Saito, 2011), it seems to
have begun to penetrate through to the national standard-setters in US and Japan and has
only recently been reflected on their actions. For example a speech by FASB chairman in
Tokyo in 2013 clearly invited Japan to maintain its Japanese GAAP.
“As we work toward developing more converged global standards, it is
critically important that we also maintain and improve the high-quality of our
national accounting standards, including JGAAP and U.S. GAAP. There are likely
to be occasions when preserving the integrity of our national business cultures
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requires us to maintain some differences in national accounting standards.”
(Russel Golden in Tokyo, 16th October, 2013101).
This is an interesting development in IFRS diffusion and the idea of ‘few global
accounting’ standards instead of one may also cascade down to other national regulatory
fields. In the competitive environment, IFRS may win over local GAAP such as in the
case of Germany (Lin et al., 2012), but in other instances, it may lose ground as in the case
of Switzerland where companies switched back to local GAAP after they had applied
IFRS for several years (Fiechter et al., 2012). The case of Canada revealed that 15% more
dual-listed companies chose to use US GAAP instead of IFRS despite the fact that Canada
had fully adopted IFRS in 2011 (Burnett and Jorgensen, 2013a).
10.5 Maintaining institutional work
The previous sections have discussed the disrupting and creating institutional work
during the IFRS adoption process. This section will discuss ‘maintaining’ institutional
work which involves supporting, repairing or recreating the social mechanisms that ensure
compliance. Lawrence and Suddaby (2006) divided maintaining institutional work into
two groups: efforts to ensure adherence to rule systems and efforts to maintain institutions
which include reproducing existing norms and belief systems. Similar to previous
discussions of disrupting and creating work, this study also observed the transformation of
maintaining work during different stages. At the decision stage of the process, preservers
would resist IFRS but as the stages evolved, so did the form of maintaining work.
Disrupters trying to devalue the old standard encountered resistance from the
preservers who were defying the change and attempting to preserve the status quo. At the
decision stage, the opponents of IFRS might not necessarily have been in support of the
adoption of US GAAP, some of them were nationalists who believed that the country
needed to develop its own unique accounting standards or retain the status quo of
101 FASB Chairman Russel Golden addressed the meeting of Keidanren and Financial Executive
International in Japan, 16th October 2013. The full written speech is available at FASB website :
http://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175827754558&blobhead
er=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs
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harmonisation with international accounting standards (as opposed to the full adoption of
the IASB’s IFRS). However at the transition stage, the actors involved in maintaining
work were no longer the ‘nationalists’, but the dual-listed companies resisting the
elimination of US GAAP as an available option for the filing of their financial reports in
their home capital market.
Another type of maintaining work was also observed following IFRS implementation.
This maintaining work involved the actors establishing barriers to discourage further
institutional change in the new transformed regulatory fields by enhancing the norms of
the full adoption pathway. The following sub-sections will discuss different forms of
maintaining works by actors which evolved through the different stages of the adoption
process: namely, resisting IFRS, preserving US GAAP, replacing old actors, and
maintaining the full IFRS adoption.
10.5.1 Resisting new (and maintaining old) standard
The selection criteria of the sampled countries in this study were important to observe
resisting and maintaining work. By looking at the countries with a strong past connection
to US GAAP, this thesis has been able to provide deeper and broader explanations of
IFRS resistance. The two main reasons for resisting IFRS adoption are a sovereignty issue
and questions regarding the independence of the IASB.
As has been discussed in the empirical chapters, technical issues did not dominate the
arguments to adopt IFRS (see p. 140). The sovereignty issue was the main reason behind
the nationalists’ resistance to IFRS adoption. IFRS opponents tried to distinguish between
the two sets of standards and argued that adopting IFRS would mean that they would lose
control over their local standards which would cease to exist if the country adopted IFRS.
The nationalists in the sampled countries mainly argued that IFRS was an ‘alien’ set of
standards believing instead that accounting standards should be ‘indigenous’ and that two
categories could not co-exist in the same field. The sovereignty issues seemed to be much
stronger in the developed countries than in the developing. As was discussed in chapters
eight and nine, the respondents in Japan and the US were very proud of their local GAAP
and believed that their accounting standards were on par, if not better, than IFRS.
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In contemplating a choice between IFRS and US GAAP, the pro-IFRS actors sought
to discredit US GAAP to convince other actors that IFRS was a better choice. In Canada
where the debate between IFRS vs US GAAP was most ostensible, arguments centred
around US GAAP complexity, detailed nature and lack of international recognition as a
global standard. However these arguments were not strong enough to persuade other
actors to support the prohibition of US GAAP.
On many occasions, IFRS opponents also accused the IASB of lacking independence.
Here, for example, is an argument from Canada:
The AcSB should maintain its current strategy except in instances where the
existing Canadian standard is ‘better’ and the new standard may provide lower
quality information. It should be considered that in some instances, there are
political motivations underlying standards specific to a country or region, which
results in entities being required to adopt a sub-optimal standard. (Excerpt from
the summary of roundtable discussions in Canada July-October 2004, FRAS
Canada).
Maintaining institutional work had preserved US GAAP as an option in some
jurisdictions despite some disruptive work to prohibit US GAAP upon full IFRS adoption.
Although the standard-setters in few national regulatory fields may have been contented to
switch from US GAAP to IFRS completely, their market regulators were compelled by
users to continue allowing the use of US GAAP. After IFRS was adopted, the capital
market regulators wanted to reduce the regulatory competition in the fields by prohibiting
US GAAP in their jurisdictions. However in the two sampled countries of the study where
US GAAP was an option before IFRS adoption, it still remains as an option now despite
the efforts to prohibit US GAAP.
The two main arguments cited by US GAAP proponents were driven by efficiency
and market demand rhetoric. The efficiency rhetoric focused on the cost of compliance to
IFRS. Keeping the two systems was considered by preparers as inefficient, as the
companies still wanted to continue reporting under US GAAP for the US SEC filing. The
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market demand rhetoric focused on the perceptions among preparers of market needs. US
GAAP proponents argued that their financial reports would not be comparable with their
competitors if they were not using US GAAP. Using US GAAP was deemed necessary by
the market as their investors and clients are mostly in the US and more familiar with US
GAAP. If they were prohibited from using US GAAP in the local market, they would need
to keep two bookkeeping systems as they wanted to continue producing reports under US
GAAP.
The market demand rhetoric was also used by Japanese dual-listed companies. These
companies claimed that by using US GAAP, their financial reports would be more
comparable to their US competitors. Low market demand for IFRS was also enunciated
by respondents from the US which then discouraged the US SEC from executing their
roadmap in 2008 (Adhikari et al., 2014). The efficiency and market demand rhetoric
seemed to be effective as they became the game-changers in some countries retaining US
GAAP.
10.5.2 Maintaining the IFRS adoption decision: Reinventing the old actors
As was discussed in the previous empirical chapters, reaching the IFRS adoption
decision was an important milestone for the sampled countries. Previous section of
‘creating’ institutional work highlighted the actions of actors to introduce the belief
system of international accounting standard in to the field. After the IFRS adoption
decision was reached, the pro-IFRS actors need to maintain the decision by ensuring the
adoption process could be executed properly. This section aims to discuss the maintaining
institutional work by actors to sustain the decision of IFRS adoption.
The decision to adopt IFRS is often followed by the establishment of a new standard-
setter, replacing the accounting standard setting body, which would be responsible for
carrying out the adoption plan. For example, Brazil was compelled to create a new private
standard-setter to adopt IFRS. The Philippines reformed its accounting standards
committee into a formal board and Indonesia established an IFRS implementation team,
similar to an interpretations committee which deals with implementation issues. Other
countries outside this sample who established a new accounting standards board to support
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the decision to adopt IFRS include South Korea (Arnold, 2012) and South Africa (ACCA,
2010). While some countries created new standard-setting bodies, the Canadian standard-
setter decided to wind up some of its committees, including the Emerging Issues
Committee (EIC) which since its inception in 1988 was seeking a solution to various
emerging issues by looking at US GAAP.
National standard-setters need to reinvent themselves to remain relevant and maintain
their survival after surrendering their sovereignty to the IASB. They used to be the local
authority responsible for developing accounting standards to cater to the needs of domestic
companies, but upon the adoption of IFRS their role changed to being partners of the
IASB, disseminating new IFRS and collecting local implementation issues to be reported
back to the IASB. The new role of national standard-setters for example was discussed
between IASB and IFASS in during 2014 which then creates the document “A Model for
National Standard-setters”:102
This Model for National Standard-setters (NSSs) is designed to provide a basis
for a NSS to maximise its contribution to the quality of general purpose financial
reporting, particularly through participation in the development of high-quality
global accounting standards issued by the International Accounting Standards
Board (IASB) – (IASB, 2014 “A Model For National Standard-setters” para 1.1.
pg.1 )
The diffusion of IFRS not only encourages the creation of new standard-setting
bodies, but it also makes them more similar to one another. Historically, accounting rules
were promulgated by parliament or by accounting standard-setters with different
governance forms across countries. Some standard-setters are a council inside a
government bodies (e.g China Accounting Standard Committee inside the Ministry of
Finance), while in other countries the standard-setters are the council under the accountant
association. However, with the adoption of IFRS, some countries experienced reform in
their standard-setters from quasi-bureaucracy to the quasi-judicial with similar logic to the
IASB, an independent standard-setter with technical experts.
102 The document is available at: http://www.IFRS.org/The-organisation/Advisory-
bodies/Documents/A-Model-for-NSS-May-2014.pdf (accessed 26th September 2015)
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The appointment of pro-IFRS individuals to lead the new accounting standard-setters
is also pivotal in supporting IFRS adoption. The impact of individuals in strategic
positions should not be underestimated. The appointment of a pro-IFRS leader is another
example of important institutional work undertaken in some countries. This thesis finds in
some countries, that the golden era of IFRS took place when the leaders of important
organisations were pro-IFRS. The obvious example is the case of Japan where the first
ASBJ Chairman, Shuzuki Saito was replaced by Ikuo Nishikawa. Arguably, Nishikawa
who was the Japanese representative to the IASC from 1993 to 1998 is more pro-IFRS
than his predecessor. Under Nishikawa’s leadership, the relationship between the ASBJ
and the IASB significantly improved. The case of the US also has illustrated the pivotal
role of key individuals in changing the course of IFRS adoption in the country. The
golden period of IFRS in the US when the likelihood of IFRS adoption is very high, was
during the leadership of Robert Herz, the former member of IASC.
The case of Indonesia has also emphasised the importance of strong leadership in
executing the decision to adopt IFRS. The new leaders of the national standard-setter,
appointed six months after the re-announcement of IFRS convergence, was noted by most
Indonesian respondents as a very important support for the process of IFRS convergence.
The previous leader had been labelled by respondents as ‘too risk averter’ and ‘too slow’
and might contribute to the failure of meeting several IFRS target years.
In essence, maintaining the decision of IFRS adoption may involve creating a new
institution and appointing the pro-IFRS individuals to lead such new institution. One may
argue that such efforts of actors should be classified as ‘creating’ institutional work as it
involves creating new institution, however this ‘new actors’ (new standard-setters and new
leaderships) have been established under a very clear goal: to secure the success of IFRS
adoption by doing all the technical work necessary to adopt IFRS in to the legal-binding
local standard. With these new actors, the decisions to adopt IFRS were executed by,
arguably, a stronger and better resourced standard-setting body.
10.5.3 Maintaining full IFRS adoption
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While resisting IFRS and maintaining US GAAP were apparent during the decision
and transition stage, other maintaining work was observed at a later stage. Starting from
the first day of the IFRS reporting year, countries enter the implementation period. Unlike
the transition stage, by the time countries enter the implementation stage, they would have
spent too much on resources to withdraw from their commitment to adopt IFRS.
Countries which adopt IFRS are usually advised by the IASB103 to fully adopt the
whole standard without any modification. In doing so, the national accounting standard-
setter is required to relinquish its authoritative power to the IASB. Upon the adoption of
IFRS, actors tried, in certain cases, to maintain full IFRS adoption by avoiding making
amendments or creating new standards. Discrepancies with IFRS are only allowed if the
country has reduced the accounting options in the standard, -- e.g. Brazil only allows the
use of historical cost for the measurement of property plant and equipment while IFRS
also provides the revaluation model as an option.
In other countries such as the Philippines and Canada, the standard-setters tried to
discourage divergence from IFRS by streamlining their due-process and asking their
stakeholders to give comments to the IASB directly. For example, following IFRS
adoption in the Philippines, the board no longer issues their own exposure drafts and board
deliberations are much shorter104. Following the adoption of IFRS in Canada, for every
standard adopted105, the standard-setting board issued the IASB’s exposure draft (ED)
with a leading type of question to agree with the IASB and discourage divergence from
the IFRS standard. For example, the question in the excerpt below is from the AcSB ED
on leases in August 2013.
The proposed standard has been developed by the IASB for application by
entities around the world. Assuming the Exposure Draft proposals are approved
By the IASB, do you believe that there are aspects of the proposed standard that
make some or all of it inappropriate for Canadian entities, even though it is
appropriate for entities in the rest of the world? If so, please specify which aspects
103 Interview with respondents from Philippines for example explicitly said they were told by IASB that
IFRS should be adopted word by word without any alterations. 104 Based on the interview with technical staff of FRSC Philippines and FRSC former member. 105 Canadian respondents mentioned the purpose of that question on every ED issued is to discourage
Canadian stakeholders to disagree with IASB’s position.
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and what circumstances make the accounting requirements proposed in the
Exposure Draft inappropriate for Canadian entities. (Leases ED pg. 1, August
2013, AcSB of Canada).
In order to maintain full compliance with IFRS, national standard-setters have
refrained from making their own standards or interpretations. If they have specific needs
which are unaddressed by the IASB, national standard-setters try to influence the IASB to
revise the IFRS or lobby the IFRIC to issue interpretations. Examples are Indonesia’s
efforts to clarify the accounting for land and IAS 41 Agriculture or Canada’s in rate
regulated activities.
10.6 Beyond implementation: The new battlefields
Figure 6 shows that after IFRS is implemented, new battles may continue to emerge
in the national regulatory fields. The tensions between actors with different interest in
IFRS implementation continues and actors may employ different forms of institutional
work. During the IFRS implementation stage, this study observes that the debate among
actors in the fields became more technical rather than political. During the decision stage
most of the technical accounting issues were insignificant factors in decision-making and
non-technical accounting issues dominated the debate. However, as the country started to
apply IFRS, some complexities emerged. For example, IFRS accounting policy was not
matched with the accounting requirements stipulated by the country’s company law such
as in the case of equity accounting in Brazil or preparers started to realise some aspects of
particular standard would be onerous to apply like the case of IAS 41 Agriculture in
Indonesia. Tensions may be increased between national standard-setters, preparers and
also regulators to evaluate the commitment to full IFRS adoption.
The increase of technical debate may have encouraged national standard-setters to
have a wider discussion outside their own jurisdiction. In the past when each country
developing their own unique accounting standards, such international/regional discussion
arguably would be more difficult. IFRS has served as the common technical accounting
language across countries which makes such technical discussion more feasible. Thus a
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new ‘space’ has emerged to facilitate these cross-country technical discussions with
potentially significant implications.
10.6.1 The emergence of regional clubs: The new organisational field?
By adopting IFRS, a country also becomes a member of a larger community and
might need a bigger voice in order to influence the IASB. Adopting IFRS creates a
different logic as how the national regulatory fields operate. The actors in a national
regulatory field are able to consider if their need for a standard fits with other countries
and can be considered an international issue. Before the adoption of IFRS, the actors may
have only had to consider the needs of their national stakeholders. However, after
adoption they realised that if their local issues are not of interest to their counterparts
internationally, the IASB may not cater to their needs by issuing the relevant standard. The
logic which underpins the national regulatory field accordingly is transformed from ‘local’
to ‘global’. Thus in maintaining the status of a full adopter, the national standard-setter is
increasingly likely to be operating in an international or regional regulatory space to lobby
other countries and to push their issues at the international level.
To illustrate, regional groups such as the AOSSG, established in 2009, and GLASS,
established in 2011, have emerged as a new regional regulatory arena where national
standard-setters meet and discuss similar issues. The AOSSG, for example, established
various working groups and meets, formally, twice yearly. National standard-setters also
organise themselves to meet twice a year at the global forum called the International
Forum of Accounting Standard-setters (IFASS). IFASS serves as an international
regulatory arena where national standard-setting bodies come to meet voluntarily to
discuss their issues and if further joint efforts are needed to bring the issue to the IASB’s
attention, for example, through joint research or a joint discussion paper.
Interestingly these initiatives such as IFASS, AOSSG and GLASS did not emerge
from the IASB, but were instead bottom-up initiatives from the national standard-
setters106. The IASB has its own ‘international platform’ to provide opportunities for
106 For background of AOSSG see “AOSSG Strategic Plan 2015-2019” para.2.2
http://www.aossg.org/docs/About_Us/AOSSG_strategic_plan_March_2015.pdf (accessed 12th September
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national standard-setters to voice their concerns. IASB advisory forums include ASAF,
EEG and the annual WSS (World standard-setters conference). The decision to get
involved in regional and international standard-setter activities was one of the efforts to
maintain the existence of the national standard-setters. It could be argued that upon the
adoption of IFRS, national standard-setters are no longer essential as most of the due
process work in standard-setting would be undertaken by the IASB and the adopting
countries are discouraged from making any amendments to the standards. The UK FRC,
despite criticism from the UK and international constituents107 went forward to close the
UK Accounting Standards Board in 2012 (Jones, 2012). An ACCA report also suggested
the curtailment of the standard-setting budget at the national level upon IFRS adoption
(ACCA, 2010). Thus to remain relevant, national standard-setters need to reinvent their
role to become the advisers of the IASB and partners in IFRS research activity. The
regional groups of standard-setters can be seen as a new regulatory field system between
the global and the national. This new field has just emerged within the last decade and
may gain more influence in the future. More technical accounting debates may be
discussed at these regional meetings and as members of the groups build their IFRS
technical competency, their input could be more influential in the future.
10.7 Conclusion
This chapter elucidates that the IFRS adoption process is a continuous battlefield
between different forces and actors involved in institutional work that seeks to change
and/or resist change and transformation in national regulatory fields. This chapter
proposed an analytical framework using processual approach distinguished from the
current existing hierarchical model (Dillard, et. al 2004) widely used in analysing the
IFRS adoption process.
This chapter has proposed an analytical framework of IFRS adoption processes in the
national regulatory field, drawing on the institutional work theory (Lawrence and
2015) and the history of GLASS is available in this link: http://www.iasplus.com/en/resources/regional/glass
(accessed 12th September 2015) 107 The UK FRC received 72 responses from UK and international organisations, with many of the
response letters expressed concerns over the winding up of the ASB and ADB and restructuring it as
advisory council of FRC. All response letters are available at FRC website : https://www.frc.org.uk/Our-
Work/Publications/FRC-Board/Consultation-on-the-future-role-of-the-Financi/Consultation-responses.aspx
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Suddaby, 2006; Lawrence et al., 2009). The framework provides an integrative model of
institutional dynamics which show less deterministic links between one type of
institutional work to one particular institutional outcome. The extant literature on
institutional work has tended to examine single institutional processes (Hirsch and
Bermiss, 2009; Trank and Washington, 2009; Suddaby and Viale, 2011) or identify causal
relationships between an individual form of institutional work and its intended effects
(Zietsma and Lawrence, 2010). In contrast, the presented analysis of IFRS adoption has
observed the dynamics and interplay between three categories of institutional works
despite different institutional outcomes.
This chapter has provided a significant analytical tool to examine the adoption
processes associated with an international set of standards by considering the dynamics of
institutional work within national regulatory fields and the interconnected relationship
between international and global regulatory fields. It also highlighted the growing
emergence of the regional regulatory fields. This chapter has also argued that
transforming the logic from localism to globalism and creating the necessary institutional
infrastructure are supporting factors in the success of IFRS adoption. Such findings and
their overall contribution to knowledge and the implications for regulatory policy making
are considered in the next concluding chapter of the thesis.
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Chapter 11. Overall Conclusions
11.1 Overview of the study
Over the last 15 years, the inexorable and irreversible rise of IFRS as the set of global
accounting standards has been built on the premise that IFRS is high quality and therefore
results in economic and capital market benefits to adopting countries. Countries were
advised to adopt IFRS in full, without modifications, to gain maximum benefit.
Considering the importance of IFRS diffusion as a regulatory event, it is not surprising
that there is a burgeoning number of empirical studies about the intended and unintended
consequences of this global regulatory change (see Brüggemann et al., 2013 ; Tarca,
2012). However in most academic research, the IFRS adoption status of a country is a
mere statistic without any further detail or analysis of the different levels of IFRS
penetration. The countries which have adopted IFRS are often classified into different
categories based on their adoption status and researchers have overlooked the
transformation of national regulatory fields arising from the adoption process.
This thesis has explored that IFRS adoption processes across six countries where there
were evident grounds for anticipating that decisions about IFRS adoption would involve
consideration of the competing merits of US GAAP. The anticipation was that in countries
with capacity to consider in choosing between two sets of quality standards, debates over
adoption would have been dominated by quality considerations. However, instead this
thesis has revealed the highly politicised nature of IFRS adoption processes. By utilising
rich data from various reports, speeches, minutes of the meetings and 69 interviews with
key actors, this thesis aims to untangle the political process inside these six countries by
analysing who the actors were, their roles and the institutional work they were engaged in.
Although this thesis has focused on institutional change at the national field level, it
has also highlighted the varying degree of interactions between these national and global
regulatory fields. For example countries such as the US and Japan are very influential in
the global arena where every decision they made on IFRS could result in a significant
impact on other countries. Various national actors were also individuals with network
capital at the global level (e.g. partners of Big Four firms or former members of the
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IASB). Individuals involved in the accounting standard-setting often moved from national
accounting bodies to the international and vice versa.
This thesis has been focused more on the process of IFRS adoption and not on very
much the result such process. The fact that the institutional outcomes of the sampled
countries vary and that some of the sampled countries in this thesis have successfully
implemented IFRS while others have not, also served to highlight the value of the
different research pathway adopted in this study. Other existing IFRS adoption studies
have tended to take the institutional outcome (once IFRS was adopted) as their starting
point for the analysis (Mir and Rahaman, 2005; Artikis et al., 2010; Tyrrall et al., 2007;
Albu et al., 2011; Jaruga et al., 2007; Irvine, 2008). This study has focused on the
institutional work of the actors that led to such varied outcomes in the process, providing a
richer level of analysis beyond the ubiquitous isomorphistic explanations offered
elsewhere on IFRS adoption.
This final chapter aims to reflect on overall significance of the study and its
implications for subsequent research in this area. In subsequent sections, the chapter
summarises the primary research findings, assesses its implications, primary research
contribution, policy recommendations and agendas for future research.
11.2 Summary of main findings
This study aims to answer three research questions: (1) How did the decision to adopt
(or not to adopt) IFRS emerge in these 6 selected countries, which actors were involved in
the process and what factors both endogenous and exogenous, determined the decision?
(2) How prominent were arguments about the relative quality of IFRS vs. US GAAP (or
the local GAAP) in debates over IFRS adoption and did other issues have greater
prominence? (3) What can be gained from detailed investigation of the process of IFRS
adoption in individual countries in terms of: (3a) better explaining the processes through
which IFRS has become a global accounting standard; and (3b) improving our
understanding of institutional change and the dynamics of institutional work in the
regulatory field?
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The first question was addressed in the four empirical chapters of the thesis where the
story of IFRS adoption of each sample countries were discussed in detail. Sample
countries pursued different mechanisms in the process of IFRS adoption, however similar
stages were observed across countries namely harmonization, decision, transition and
implementation stages. This study has argued that the process of IFRS adoption is not a
static linear chain of events, but instead an ongoing engagement amidst continued
transformations in national regulatory fields. National actors with different interests,
influenced by international actors, were engaged in various types of institutional work in
transforming their national regulatory field. The continued battle between actors in the
four adoption stages made the outcome of the process less predictable.
Addressing the second question, this study found that the quality argument IFRS
versus US GAAP did not dominate the decision making process. National actors involved
in the decision making process recognised both IFRS and US GAAP as good quality
accounting standards, especially as both standards are the product of a rigorous due
process. Countries in the study adopted IFRS for several reasons other than quality such
as: (1) to comply with international bodies recommendations such as World Bank and G20
and (2) to maintain their influence in the IFRS making arena which requires commitment
to IFRS adoption. This study also documented that the quality of IFRS is not a major
reason for developed economies not adopting IFRS. The sovereignty issue is a more
dominant factor for the USA to retain their accounting standard-setting authority. Upon
the adoption of IFRS, some countries were compelled by the pressure of their stakeholders
to allow the use of US GAAP despite regulator desire to ban it. The pressure from the
users to retain US GAAP was dominated by efficiency and market demand rhetoric, not
by the quality argument.
Although specific technical accounting issues did not dominate the decision making
process, they occasionally became more significant at an implementation stage. Often
arguments between disrupters and preservers were political arguments rather than specific
quality comparisons of technical accounting standard issues. However, the technical
accounting issues became more apparent after IFRS was adopted and preparers began the
implementation process. The dissatisfaction among preparers over specific technical issues
encouraged national standard-setters to make requests for IFRS amendments. The failure
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of some of them to achieve desired amendments has threatened their sustainability and
compelled them to seek stronger alliances and form regional groups of standard-setters.
In answering Question 3a, this study offered another explanation to those advanced in
the existing literature of how IFRS has been diffused to become a global accounting
standard. Examining the argument more closely, as part of creating institutional work, the
national actors have enhanced the image-making cycle of IFRS as the global set of
accounting standards. This thesis has found that the concurrent successful diffusion of
‘globalism’ has underpinned the logic responsible for the rapidity of the diffusion process.
This study argues that it is not IFRS as a standard per se which was diffused, but the idea
of ‘one set of global accounting’ standards that has travelled and been adopted by the
countries. IFRS has been promoted by its makers and other international bodies as being
the reification of the idea of ‘one global accounting standard’. The extensive adoptions of
global standards, such as IFRS, is consistent with the world society perspective which
argues that we now operate in a global arena which then encourages the promotion of
global standards (Brunsson and Jacobsson, 2000; Drori et al., 2006b; Meyer, 2010; Djelic
and Sahlin-Andersson, 2006). This thesis has shown that decisions to adopt IFRS do not
necessarily have a rational consideration but do have a strong emotive aspect attached to
them. By adopting the IFRS, countries exposed different aspirations with regard to their
position in the global IFRS community. Countries may have decided to adopt IFRS to be
portrayed as modern and recognised as members of the global regulatory club. However
some other countries may have chosen IFRS in an effort to exert (or maintain) their
influence at global level. When some influential countries rescinded their decision to
adopt IFRS, technical considerations do appear to have been overpowered by the emotion
of being let down as was demonstrated in the case of the US in chapter nine.
In answering Question 3b, this study offers a new insight of the behaviour of
institutional work in the field change. This study observed that different types of
institutional work do not occur autonomously but rather in an interconnected way. This is
a refined perspective on institutional work theory. Lawrence and Suddaby (2006) made
each category of institutional work (creating, disrupting and maintaining) theoretically
distinct but this thesis finds that they are empirically coterminous and often are
intertwined during the IFRS adoption process. The analytical framework proposed by this
thesis in chapter ten, drawing on institutional work theory, also suggests that institutional
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work is capable of evolving in form throughout the various stages of adoption. The
framework, developed to analyse the institutional change at the regulatory field level, will
be useful for other researchers to use in their analysis of different regulatory fields and
process of global standards adoption.
11.3 Implications of the study
This thesis has enhanced our understanding of the processes of institutional change
that have occurred in the pursuit of IFRS adoption. Such enhanced understanding in turn
has various research implications as discussed below.
This thesis has shown that the shifting logic of accounting standard-setting from
‘localism’ to ‘globalism’ brings institutional implications for national standard-setters. In
the process of IFRS adoption, national standard-setters are more likely to become private
independent bodies working with a judicial-technical expert logic rather than their
previous form as bureaucratic entities within a government agency. This is an interesting
phenomenon as other international standard diffusions (for example, the diffusion of
IPSAS or the GRI standard) have not necessarily created the diffusion of a particular
institutional arrangement for the rule maker at national level.
As the diffusion of the same global principles occur worldwide, the organisational
structures and processes become similar and more predictable (Meyer et al., 1997; Meyer
and Rowan, 1977; DiMaggio and Powell, 1983). The IFRS diffusion has encouraged a
global diffusion of organisational structures and standard-setting processes. Accounting
standard-setters around the globe become much more similar in their form and due process
after IFRS is diffused. For example, in the sampled countries, upon the decision to adopt
IFRS, Japan and Brazil created a new private standard-setter with a similar governance
structure to the IASB. As the national standard-setters changed their structure to mimic
‘global’ standard-setters, this thesis also found that their role was also transformed. After
the adoption of IFRS, national standard-setters suddenly felt the need to become part of
international organisations. National standard-setters are usually not in a position to create
their own standards after IFRS adoption, thus they needed to create allies to scale up their
local issues into ‘international’ issues in order for these to be taken up by the IASB as part
of their agenda. This has also resulted in the creation of regional accounting standard-
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setters such as the AOSSG, and GLASS. This regionalisation of accounting standard-
setters is a new bottom-up initiative by national standard-setters to amplify their influence
on IFRS standard-setting. National accounting standard-setters, especially those with
weaker influence over the IASB appeared to be benefiting from joining these groups to
escalate their local issues to the international IFRS arena.
As was discussed in chapter ten, the emergence of regional groups of standard-setters
was also a case of maintaining institutional work in keeping the national standard-setters
relevant. Upon the adoption of IFRS, much of their role in standard-setting was taken over
by the IASB, thus they needed to reinvent themselves to survive by becoming advisers and
partners of the IASB. Otherwise they faced the threat of being wound up as their role was
perceived to be diminishing. As argued by Camfferman and Zeff (2015), one of the
reasons behind the winding up of the UK Accounting Standard Board (ASB) was the lack
of a need for a national standard-setter as UK GAAP moved closer to IFRS (p.542). The
standard-setter in Germany (DRSC) also faced imminent collapse in 2010 when the
committee was confronted with the inability to secure funding from the preparer’s
community. The view among preparers in Germany was that the DRSC had failed in
representing German companies’ views to the IASB (Camfferman and Zeff, 2015).
The regionalisation of accounting standard-setters is a new phenomenon with
unknown implications for future IFRS development. At the moment these regional groups
supported the IASB in its research and outreach activities regarding new exposure drafts
or standards. The involvement of these new actors in the IFRS-making arena improves the
input legitimacy of the standards produced (Botzem and Dobusch, 2012). The initiatives
to create regional and international alliances have come from national standard-setters,
through their involvement in IFRS-making, as they are the rule-takers of IFRS at the
international level; providing significant weight to the input legitimacy of IFRS.
However in the future, the role of these regional groups is difficult to determine as
they may also pose a threat to the globalism logic of accounting standard-setting. The
regional groups serve as a platform for national standard-setters to discuss the accounting
challenges in their jurisdictions. These groups are able to identify the needs of the regions
they represent which are often not picked up by the IASB. In the future they may create
some implementation guidelines or even new standards. After the localism logic of
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accounting standard-setting is replaced by globalism logic, the ‘regionalism’ logic may
evolve in the future where accounting standards could be developed based on certain
economic/trading blocs. In the future, this regionalism logic may encourage the
development of a number of ‘global accounting standards’ which has been normatively
discussed by some accounting academics for some time (Walker, 2010; Sunder, 2002;
Sunder, 2011; Saito, 2011)
This study also offers new insights for non-accounting global standard-setting
activities. In terms of IFRS diffusion, the endorsement of international bodies is an
important element in the diffusion process; however for any standard to be successfully
diffused, the capacity of national actors to institutionalise global standards at national level
is utterly important. Being able to connect to the global regulatory outlook has been
important for IFRS, but it has not been sufficient just to claim that IFRS is the best set of
global standards, in addition, there is also a need to have the support from national actors
embedded in the globalism logic. International bodies promoting global standards such as
World Bank should identify who the actors are at national level and how they can build
strong cooperation with them. They need to be cautious of the network effects of decisions
for or against adoption. An adoption withdrawal from an influential adopter (as in the case
of the US in this study), may create a negative network effect discouraging other
prospective adopters.
11.4 Research contributions and policy recommendations
This thesis contributes to the study of globalisation and standardisation by revealing
the adoption process of global standards at the national regulatory level which is pivotal in
supporting the diffusion of such standards globally. Books discussing globalisation or
international regulation usually make visible reference to the success of IFRS diffusion
(see Djelic and Sahlin-Andersson, 2006; Drori et al., 2006b; Benston et al., 2006).
Standardisation is an active, time and resource-intensive process (Timmermans and
Epstein, 2010). The current literature on globalisation often argues that the power of state
actors has diminished as they have adopted international standards (Boli and Thomas,
1997; MÖrth, 2009). However, this thesis has shown the national regulatory fields remain
important for the consistent application of global standards. For example, a 2010 ICAEW
report on Audit Quality acknowledged national diversities in applying global auditing
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standards. Similar studies are also apparent in the application of IFRS (Nobes, 2013). As
part of globalisation studies, the story of IFRS has often neglected the significance of
national actors and the adoption process at the national level. Thus this thesis provides a
new analytical framework for the further study of the global standard adoption process.
This study also contributes to the development of institutional work theory. It has
focused more on the institutional work of actors rather than on the intended effects of the
work itself. For example, examples are provided of how the creating and disrupting work
of IFRS have been successful in many countries but not in others. A study focusing on the
work of actors instead of the outcome, such as this thesis, answers the call from Lawrence
et al. (2013) on this overlooked area in the growing institutional work literature.
Although this thesis has benefited from the use the institutional work theory, it also
highlighted the challenges of applying the theory. The definition of institutional work
proposed by Lawrence and Suddaby (2006) is ‘‘the purposive action of individuals and
organizations aimed at creating, maintaining and disrupting institutions’’ (p.215), which
implies that actions of actors need ‘purpose’ or ‘actor’s intention’ to satisfy the definition
of institutional work. Institutional work enables us to understand the purposive actions of
national actors in transforming the national fields, but there are other actions outside the
national fields which are detrimental and cannot be classified as institutional work. For
example, the decision by the US SEC to rescind its IFRS adoption pathway in 2011 was
pivotal for Japan to take similar decision, but in analysing the Japanese regulatory field
this action cannot be classified as institutional work. Action that can be considered as an
institutional work is the response of Japanese actors towards the US decision, but not the
action of the US SEC because the ‘intention’ of such decision was only for the US
jurisdictions. As was reiterated in the interviews, respondents from the US emphasised
that any decision by US FASB and US SEC, especially in developing standards, only take
US interest in their considerations.
Zilber (2013) challenged the definition of institutional work by asking “if every such
act is ‘institutional work – what is unique about institutional work that distinguishes it
from all actions that do not qualify?” (pg.91). Central to the notion of institutional work
are the intentions of actors, but this thesis shows that the boundary of institutions is also
important in order to classify whether one action is an ‘institutional work’ or not. The
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action of the US SEC to allow IFRS for foreign issuers in 2007 was a significant
‘institutional work’ in the global arena as the intention of such decision (partly) was to
appease international pressure especially from Europe (Herz, 2013). It also encouraged
other institutional change in other countries resulting in the adoption of IFRS, but in
analysing the national regulatory field (e.g Japan), such decision can be challenging to
satisfy the definition institutional work as the US SEC may not have intended to influence
the decisions of other countries. The fact that this decision heavily influenced other
national actors to adopt IFRS may not be enough to be classified as “institutional work” as
US SEC were neither representing those jurisdictions nor intended to promote IFRS to
other countries. Thus the endogenous aspect of institutional work may preclude the
identification of exogenous events which can be central to the institutional change.
This thesis finds few types of actions can be classified either as creating or disrupting
institutional work, depending on whose perspective of the actors are used in presenting the
study. For example the ratification of company law in the Philippines and Brazil,
mandating the adoption of IFRS, can be seen as a disruption of the old accounting
practices as well as creating the new accounting standard at the same time. The efforts to
promote IFRS in Canada for example, can be seen as ‘creating’ institutional work from the
point of view of IFRS supporters but can be also classified as ‘disrupting’ institutional
work from the point of view of Canadian GAAP supporter. The action of US SEC in
2011-2012 to abandon its IFRS adoption pathway can be seen as ‘maintaining’ the
existence of US GAAP from the point of view of US GAAP supporter or can be seen as
‘disruptive’ effort of institutionalising IFRS from the point of view of IFRS supporter. In
studying a field with multifaceted actors pursuing different types of institutional work,
sometime the application of institutional work categories is not as straightforward as one
may be expected.
This study offers several policy recommendations. First, this study informs the IASB
on the process and the implications of IFRS diffusion. As more countries adopt and
improve their institutional competencies, their input in the IFRS policy-making process
will be more diverse compared to 10 years ago. As countries in emerging markets are
building up their IFRS technical competencies, the IASB may also encounter stronger
demands for new standards or amendments from more various types of capital markets.
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Creating the balance of inclusivity in due process and the independence of IASB could be
more challenging in the future.
Second, the observed shifting role of national standard-setters upon IFRS adoption
may encourage countries to strategically reposition their standard-setting institutions.
One may argue that if all the countries adopt the same standard, there is no need for
national accounting standard-setters in the future. The ACCA, for example, proposed that
a country should reduce the cost of their standard-setting as most of the due process has
been performed by the IASB and a country needs to reassess the role of their standard-
setter once the adoption process has been completed (ACCA, 2010). In contrast, this
research argues that the cost to maintain the existence of national standard-setters after
IFRS adoption is more likely to increase than decrease as international lobbying activities
may be increase. As the logic of national standard-setters evolved from localism to
globalism, they have been compelled to be part of regional or international players. The
cost associated with the increasing international activities of national standard-setters is
the inexorable price that they have to pay to stay relevant in the international standard-
setting arena. As national standard-setters are discouraged from changing IFRS in the
adoption process for their jurisdictions, they now need to form alliances with other
countries in order to push their issues to the international level so that the new standards
produced by the IASB as well as the existing ones address these technical accounting
challenges (through amendments or interpretations) which may have appeared specific to
those jurisdictions before the alliances were formed.
Lastly, this study provides an insight for other countries who are still thinking about
adopting IFRS. The UN has 193 member countries while the IFRS Foundation in their
survey of the use of IFRS claimed that 114 jurisdictions108 have adopted IFRS for their
listed companies, thus there are about 79 countries that are still at the early stages of the
decision-making process. The study offers lessons learned for prospective adopters by
providing different explanation of how the mechanisms of adoption can be varied
depending on the institutional arrangement and the power of actors in the field. For
example although this study suggests that the enactment of corporate law may support the
legitimacy of IFRS adoption, such a decision may also lead to a chaotic transition if the
108 http://www.IFRS.org/Use-around-the-world/Pages/Analysis-of-the-IFRS-jurisdictional-profiles.aspx,
accessed 10th November 2014.
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law is enacted in a hurry. Prospective adopters of IFRS may also consider the readiness of
their infrastructure in their national regulatory field as this study suggests the IFRS
adoption may transformed the field with new logic and new actors. For example a country
may want to consider establishing a new multi-stakeholder standard-setter to do all the
necessary technical work of the IFRS adoption such as the case of Brazil and Japan in this
study.
11.5 Agenda for future research
The future of one global accounting standard is more uncertain than ten years ago
when Europe adopted IFRS for the first time. As was argued in chapter nine, the future of
IFRS as the ultimate global accounting standard received a serious setback when the US
abandoned their adoption plan in 2011. The hesitation to fully adopt IFRS without any
modification has spread to other countries such as Japan, India, and China (Camfferman
and Zeff, 2015 p.526-536). The battle between a ‘globalism’ logic of accounting standard-
setting against ‘localism’ or even the ‘regionalism’ logic is likely to continue at the
international level and transcends to the national level. Further study of IFRS diffusion
should therefore be informed by the possibility of an evolutionary logic in accounting
standard-setting. Regionalisation is certainly deserving of being a more central research
issue in the future.
The future study of the international standard-setting process should shift its focus
from the IASB as an institution to the interaction between the IASB and national standard-
setters and regional standard-setter groups. The IASB as a successful international private
body has been examined extensively (Camfferman and Zeff, 2007; Bengtsson, 2011;
Georgiou, 2010; Larson and Kenny, 2011; Richardson and Eberlein, 2011; Zeff, 2012;
Sanada, 2013). However, this study demonstrates that IFRS policy-making is not only
happening in the IASB boardroom in London, but also as a collegial activity incorporating
the input of various national standard-setting bodies and regional groups.
At the moment, studies about IFRS diffusion are also too European centric (Botzem,
2012; Drori, 2008; Bengtsson, 2011) and have overlooked the increasing influence of
Asian countries such as China, Japan and Korea in the IFRS-making arena. China, Japan
and Korea are gaining more representation on various IFRS bodies such as the IASB, the
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ASAF, the IFRIC and the monitoring board. Less powerful Asian countries such as
Malaysia and Indonesia have also started to have a stronger voice in response to the IASB.
The AOSSG has become a respected advisor of the IASB. More studies on IFRS as part of
research on globalisation need to include the increasing influence of the Asian region.
Qualitative researchers can respond to the quantitative studies which have argued that
IFRS can only benefit countries with strong enforcement and market incentives (Ball et al.,
2003; Christensen et al., 2007). Studies on IFRS adoption should position the action as
part of a larger regulatory reform process. It would be interesting to conduct multiple case
studies of other regulatory reforms ( such as capital market and banking regulation) across
different jurisdictions to investigate if the successes (or the benefits) of IFRS adoption
were also enhanced by the broader context regulatory reform of the country. The larger
regulatory reform may also serve as another type of institutional change which can be
analysed using similar institutional work framework proposed by this thesis.
The study of the battlefields of the adoption process such as this one enable researcher
to examine the political debate and institutional change of the regulatory field. This study
has provided an analytical framework for other researchers to analyse their own
‘battlefields’. They can helpfully be organised and interrogated through the broader and, in
comparison to the existing institutional change literature, more refined conceptualisation
of institutional change processes presented in this thesis. Hopefully it will be a framework
that will better arm standard-setting researchers to understand the national, regional and
global regulatory-setting of the future.
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Page 283 of 307
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Page 296 of 307
Appendix 1. Interview Log
No Day and Date Respondents’ position Respondent’s
Country of Origin
Interview
Duration
(hour:minutes)
1 Monday, 21st May 2012 IAI Executive Director since 1995-now Indonesia Not recorded.
About 00:40
2 Tuesday, 17th August 2012 Founder of SGV Philippine, 3rd President of IFAC 1982-
1985 Philippines
Not recorded.
About 00:15
Saturday, 16th February 2013 Second interview of respondent No.2 Philippines 4:21
3 Thursday, 6th September 2012
Member of Indonesian Accounting Standard Board 1974-
1984. Heavily involved in the decision moving from Dutch
Accounting to US GAAP in 1973
Indonesia 1:06
Wednesday, 2nd January 2013 Second interview respondent No.3 Indonesia 1:06
4 Tuesday, 11th September 2012, Current member of IAI National Council Board (2010-2014),
re-elected in 2014 to become council member until 2018 Indonesia 0:45
5 Wednesday, 12thSept 2012 Member of Indonesian Accounting Standard Board from
1990 - 1994 and also 2001-2010. Indonesia 1:14
Page 297 of 307
6 Thursday, 20th September 2012 Chairman of the Indonesian Institute of Accountants 2001-
2010. Chairman of AFA in 2007. IFAC Board 2011-2014. Indonesia 1:08
Monday, 15th October 2012 Follow Up Interview respondent No 6 Indonesia 1:09
Monday. 3rd December 2012 Third interview respondent No.6 Indonesia 0:44
7 Friday, 28th September 2012 Vice President of World Bank 1990-2001 Netherlands 0:20
8 Tuesday, 9th October 2012 Member of Indonesian Accounting Standard Board 2002-
2006. Indonesia 0:57
9 Tuesday, 23rd October 2012 Senior Technical Manager of ASBJ during the interview,
member of ASBJ since July 2013-now Japan 0:54
Friday, 26th October 2012 Follow Up Interview respondent No 9 Japan 0:49
10 Friday 26th October 2012 Chairman of DSAK 2009-2014 Indonesia 1:34
11 Thursday, 8th November 2012 Technical Manager of ASBJ Japan 0:47
12 Friday, 30th November 2012 Chairman of Auditing and Assurance Standard Council of
Philippines. Managing Partner PWC Philippines Philippines 0:20
13 Friday, 30th November 2012 Member of Board of Accountancy of Philippines 2002-2010 Philippines 1:02
Page 298 of 307
14 Saturday, 1st December 2012 Professor of Accounting from De Lasalle University Philippines 0:44
15 Saturday, 1st December 2012 Executive Director PICPA Philippines 0:44
16 Monday, 3rd December 2012 Chairman of Indonesian Accounting Standard Board 1986-
1994 Indonesia 2:17
17 Sunday, 9th December 2012 Technical Director IAI 1996-2001. Board Member of
Indonesian Financial Accounting Standard Board 2006-2010 Indonesia 0:57
18 Monday, 10th December 2012 Technical Director IAI 2002 - 2009 Indonesia 0:53
19 Tuesday, 11th December 2012 Founder of Accounting Firm SGV Utomo in Indonesia in
1970s Indonesia 0:43
20 Thursday, 27th December 2012 Observer of accounting standard development, influential
academic, member of accounting board 1990-1992 Indonesia 0:38
21 Wednesday, 2nd January 2013 Chairman of Acccounting Academics Compartment of IAI
1992-2002 Indonesia 0:59
22 Thursday, 3rd January 2013 Research support volunteers for the board 1992-1994,
Member of accounting standard board 2007-2011 Indonesia 0:21
23 Friday, 4th January 2013
Member of Indonesian Accounting Standard Board 1990-
1992 and 2000-2002. She is also member of consultative
board
Indonesia 0:46
24 Monday, 7th January 2013
Member of Indonesian Accounting Standard Board 1998-
2006. Influential in changing the governance and structure of
DSAK.
Indonesia 1:32
Page 299 of 307
25 Thursday, 10th January 2013
Member of Indonesian Accounting Standard Board since
2004 - 2012. Representing Capital Market Supervisory
Agency
Indonesia 1:06
26 Friday, 11th January 2013 Chairman of Indonesian Accounting Standard Board 2006-
2010. Indonesia 1:05
27 Friday, 1st February 2013 Member of Indonesian Accounting Standard Consultative
Board 1997-2002. Chairman of Indonesia SEC 2000-2005 Indonesia 0:57
28 Monday, 4th February 2013
Member of Indonesian Accounting Standard Board 1994-
1998. Member of working committee of the Board in 1993-
1994.
Indonesia 0:55
29 Thursday, 7th February 2013 Chairman of Indonesian SEC 1995-1998. Indonesia 1:10
30 Monday, 11th February 2013 Vice Chairman of FRSC 2004-2011 as the representative of
BOA Philippines 0:53
31 Monday, 11th February 11 2013 Chairman of Board of Accountancy Philippines 2001-2014 Philippines 1:00
32 Tuesday, 12th February 2013 Partner of SGV, Chairman of IFRS Standard Working group
for EY Asia Pacific Philippines 1:01
33 Tuesday, 12th February 2013 Partner of SGV, Technical advisor of FRSC, Secretariat of
FRSC Philippines 0:51
Thursday, 7th March 2013 Second Interview of Respondent No.33 Philippines 0:38
34 Thursday, 14th February 2013 Chief Accountant of Philippines SEC, Member of FRSC
2006-now Philippines 1:14
Page 300 of 307
35 Friday, 15th February 2013
Chairman of ASC then FRSC for 28 years. The founding
father of ASC, President of CAPA, Managing partner of
SGV
Philippines 1:12
36 Saturday, 16th February 2013 Public Accountant (auditor) of small firm. Philippines 1:11
37 Tuesday, 5th March 2013 Member of Indonesian Accounting Standard Board 1984 -
1998 Indonesia 0:29
38 Wednesday, 6th March 2013 Member of IASC 1995-2001, Member of IASB 2001-2011 Japan 0:30
39 Thursday, 7th March 2013 Chairman of IASB since 2011 Netherlands 0:51
40 Thursday, 7th March 2013 Partner of SGV EY Manila Philippines 0:38
41 Monday, 29th July 2013 IASB Director for Asia Oceania-Japan office Japan 0:53
42 Tuesday, 30th July 2013 Deputy Director, Corporate Accounting and Disclosure
Division. JFSA Japan 1:12
43 Tuesday, 30th July 2013 Director for Enforcement of Corporate Disclosure, JFSA Japan 0:38
44 Wednesday, 32nd July 2013 Professor of Accounting at Waseda University Japan 1:08
45 Wednesday, 31st July 2013 First chairman of ASBJ 2001-2007 Japan 1:36
46 Thursday, 1st August 2013 Vice Chairman of ASBJ, 2013-2016. Previous Position
include Technical Director of ASBJ Japan 1:40
Page 301 of 307
47 Sunday, 8th September 2013 Academic from Sao Paulo University, managerial staff in the
IFRS Foundation Brazil 1:40
48 Sunday, 8th September 2013 Accounting Professor from Kyushu University Japan 1:09
49 Thursday, 19th September 2013 Vice President of IBRACON and Member of CPC since
March 2013 Brazil 0:18
50 Thursday, 19th September 2013 Chief of Accountant US SEC 2009-2012, FASB Vice
Chairman 2013-2018 US 0:36
51 Friday, 20th September 2013 Technical Director of AcSB Canada (non voting member of
AcSB) 2004-2014, Staff of AcSB since 1990 Canada 1:45
52 Monday, 23rd September 2013 First chairperson of AcSB Canada 1999-2001, IASB member
2001-2007 Canada 0:46
53 Tuesday, 24th September 2013 AcSB member 2004-2012, AcSB Chairperson since July
2013 Canada 0:19
54 Thursday, 26th September 2013 Chief of Accountant US SEC 2009-2012, FASB Vice
Chairman since September 2013 US 1:05
55 Tuesday, 15th October 2013 Chairman of Japan Association of Financial Analyst,
Member of IFRS Advisory Council 2011-2014 Japan 0:47
56 Thursday, 21st October 2013 Director of CVM 1985-1989 and 2008-2009. Professor of
Accounting in the University of Sao Paulo. Brazil 1:34
57 Friday, 24th April 2014 Chairman of FASB 2002-2010 US 1:16
58 Wednesday, 30th April 2014 Chief of Accountant US SEC 2006-2009 US 1:15
Page 302 of 307
59 Friday , 2nd May 2014 Professor of Accounting at the Yale School of Management US 0:57
60 Thursday, 10th July 2014
Accounting Standard Oversight Council of Canada 2014-
2017, Chairman of IFRS Advisory Council 2009-2013,
Chairman of AcSB 2001-2009, Canadian Representative in
IASC 1997-2001
Canada 01:19
61 Monday 13th July 2014 Financial Controller of one of Brazilian Company Brazil 2:38
62 Monday 13th July 2014 Head of Financial System Regulation Department, Central
Bank or Brazil 1992-2009, Member of IASB since 2009 Brazil 1:02
63 Thursday, 17th July 2014
Chief of Accountant, Ontatrio Securities Commission
Canada since 2008, Manager of Corporate Finance OSC
2003-2008
Canada 1:01
Page 303 of 307
Items US Japan Canada Brazil Indonesia Philippines
IFRS Adoption Status
The highlighted is
excerpted from IASB
survey (June 2013)
except Philippines is
taken from
www.iasplus.com)
The SEC permits but
does not require its
foreign private issuers
to use IFRS as
issued by the IASB in
preparing the issuer’s
financial statements.
The SEC does not
permit its domestic
issuers to use IFRS in
preparing their
financial statements;
rather, it requires them
to use US GAAP
Voluntary application of
IFRS for consolidated
financial statements by
companies that meet
certain criteria has been
permitted since March
2010.
Canada adopted
IFRSs for most
‘publicly
accountable
enterprises’ for
financial years
beginning on or
after 1st
January2011.
Required for
consolidated
financial
statements of
banks and listed
companies from
31st December
2010 and for
individual
company
accounts
progressively
since January
2008
Indonesia’s stated
policy is to maintain
its national GAAP
and converge it
gradually with IFRSs
as much as possible.
Indonesia does not
have a plan or
timetable for full
adoption of IFRSs.
As of 1 January
2012, the local
standards applied in
Indonesia are based
on IFRSs that were
effective at 1 January
2009 with some
modifications.
IFRS has been
adopted to local
standards since
2005.
Which IFRS adopted
as of 20 May 2013
for domestic listed
companies?
Not applicable IFRS as designated by
the Japanese FSA
IFRS as published
by IASB
IFRS as
published by
IASB
IFRS as of 1 January
2009 with some
modification
IFRS as
published by
IASB
Appendix 2. Summary of IFRS adoption in sampled countries
Page 304 of 307
When the decision
for full IFRS
adoption was made?
Not applicable 2005 (Tokyo Agreement) 2006 (AcSB
Strategic Plan)
2007 (New Law) 2008 (Grand
Launching IFRS
Convergence)
2004
(Accounting
Act)
Who made the
decision
Not applicable ASBJ / FSA / BAC
(Business Accounting
Council)
AcSB Informally: The
President,
Formally: The
Parliament
Accounting
Profession:
Indonesian Institute of
Accountants
BOA / FRSC
Harmonization
Period with
IFRS/IAS
Not applicable 2001 (the establishment
of ASBJ)
Always
harmonised with
IAS and US
GAAP since 1998
No evidence IAS was adopted in
big bang 1994 but no
continuous
harmonizing effort
and US GAAP remain
an important reference
IAS was adopted
gradually since
1996 (ROSC)
Involvement in
IASC/IASB/ IFRS
development
Involved. Always have
representatives in
IASC/IASB and other
IFRS Foundation
bodies.
Involved. Always have
representatives in
IASC/IASB and other
IFRS Foundation bodies
Very Involved.
Founding father of
IASC. Member of
G4+1.
Representative in
IFRS Trustee
from Brazil.
More involved
after 2010 in
regional standard
setting and also
member of
ASAF.
Involved in regional
standard setting
discussion start in
2009. Member of
IASB EEG Working
Group started in 2010.
Not involved
Page 305 of 307
Institutional Arrangement of Accounting Standard Setting
Member of the Board
(as of 25 May 2014)
7 (full time) 13 (4 full time ) 12 (2 non -voting
members, Chair is
paid full time, the
rest are
volunteers)
12 members
(volunteers,
representatives
from 6 entities)
13 (all volunteers
from various
stakeholders)
15 (all
volunteers, one
chairman and 14
representative
from various
stakeholders)
Mechanism of the
Board
Quasi-Judicial Quasi-Judicial Quasi-Judicial Quasi-Legislative Quasi-Legislative Quasi-
Legislative
Technical Support of
the staff
More than 60 full time
staff
24 full time technical
staff
1 Director, 13
technical staff, 2
admin staff
Each of member
are supported by
their respective
organisation
7 (full time) 1 (part-time)
Funding of the Board Financial Accounting
Foundation
Financial Accounting
Standard Foundation
(FASF)
CICA Donations from
the founding
organisations
IAI PICPA
Oversight Board Financial Accounting
Foundation Board of
Trustees
Advisory Council within
FASF
AcSOC
(Accounting
Standard
Oversight
Council) inside
CICA
Not sure Consultative Board
insight IAI (DKSAK)
Board of
Accountancy
Other Information
Number of listed
company 2012
(World Bank)
4,102 3470 3876 353 442 268